-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DYkritwnykI3tw6cHy+Zmyxz1mkp811teYkLOHvORdvC6czSJZeNRpRvkXoBCYR5 MlmnbV7wPOM7WsBqJcA0bw== 0000039263-97-000004.txt : 19970401 0000039263-97-000004.hdr.sgml : 19970401 ACCESSION NUMBER: 0000039263-97-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CULLEN FROST BANKERS INC CENTRAL INDEX KEY: 0000039263 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 741751768 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-07275 FILM NUMBER: 97568307 BUSINESS ADDRESS: STREET 1: 100 W HOUSTON ST STREET 2: P O BOX 1600 CITY: SAN ANTONIO STATE: TX ZIP: 78205 BUSINESS PHONE: 2102204841 FORMER COMPANY: FORMER CONFORMED NAME: FROST BANK CORP DATE OF NAME CHANGE: 19770823 10-K 1 CULLEN/FROST BANKERS, INC 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 ___ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ to _______ Commission File Number 0-7275 CULLEN/FROST BANKERS, INC. (Exact name of registrant as specified in its charter) Texas 74-1751768 - ------------------------------- ------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 W. Houston Street San Antonio, Texas 78205 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (210) 220-4011 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, $5 Par Value (with attached rights) -------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. --- The aggregate market value of the voting stock held by non-affiliates of the registrant was $816,829,125 based on the closing price of such stock as of March 25, 1997. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Outstanding at Class March 25, 1997 -------------------------- -------------- Common Stock, $5 par value 22,507,928 DOCUMENTS INCORPORATED BY REFERENCE (1) Annual Report to Shareholders for the Year Ended December 31, 1996 (Parts I & II) (2) Proxy Statement for Annual Meeting of Shareholders to be held May 28, 1997 (Part III) TABLE OF CONTENTS PART I Page - ------ ---- ITEM 1. BUSINESS 1 ITEM 2. PROPERTIES 9 ITEM 3. LEGAL PROCEEDINGS 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS * PART II - ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS 10 ITEM 6. SELECTED FINANCIAL DATA 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 10 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE * PART III - -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 11 ITEM 11. EXECUTIVE COMPENSATION 11 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 11 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 11 PART IV - ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 12 * Not Applicable PART I Item 1. BUSINESS - ------------------ General - ------- Cullen/Frost Bankers, Inc. ("Cullen/Frost" or "Company"), a Texas business corporation incorporated in 1977 and headquartered in San Antonio, Texas, is a bank holding company within the meaning of the Bank Holding Company Act of 1956 ("the BHC Act") and as such is registered with the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). The New Galveston Company, incorporated under the laws of Delaware, is a wholly owned second tier bank holding company subsidiary which owns all banking and non-banking subsidiaries. At December 31, 1996, Cullen/Frost's principal assets consisted of all of the capital stock of two national banks. Including acquisitions completed in the first quarter of 1997, Cullen/Frost had 52 offices in six Texas banking markets with 19 locations in San Antonio, 14 in the Houston/Galveston area, five in Austin, ten in the Corpus Christi area, three in San Marcos and one in McAllen. At December 31, 1996, Cullen/Frost had consolidated total assets of $4,888,384,000 and total deposits of $4,242,594,000. Based on information from the Federal Reserve Board, at December 31, 1996, Cullen/Frost was the largest of the 91 unaffiliated bank holding companies headquartered in Texas. Cullen/Frost provides policy direction to the Cullen/Frost subsidiary banks in, among others, the following areas: (i) asset and liability management; (ii) accounting, budgeting, planning and insurance; (iii) capitalization; and (iv) regulatory compliance. Subsequent Event - ---------------- Cullen/Frost Capital Trust, a Delaware statutory business trust (the "Issuer Trust") and wholly-owned subsidiary of the Corporation, issued on February 6, 1997 $100,000,000 of its 8.42 percent Capital Securities, Series A (the "Capital Securities") which represent beneficial interests in the Issuer Trust. Reference is made to footnote U on page 51 of the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31, 1996, which page is incorporated herein by reference. Cullen/Frost Subsidiary Banks - ----------------------------- Each of the Cullen/Frost subsidiary banks is a separate entity which operates under the day-to-day management of its own board of directors and officers. The largest of these banks is The Frost National Bank ("Frost Bank"), the origin of which can be traced to a mercantile partnership organized in 1868. Frost Bank was chartered as a national banking association in 1899. At December 31, 1996, Frost Bank, which accounted for approximately 97 percent of consolidated assets, loans, and deposits of Cullen/Frost, was the largest bank headquartered in San Antonio and South Texas. The following table provides information as of December 31, 1996, as to total assets, total loans and total deposits of each of the Cullen/Frost subsidiary banks:
Name of Bank and Location Total Assets Total Loans Total Deposits - ------------------------- -------------- -------------- ---------------- The Frost National Bank, San Antonio, Corpus Christi, Austin, Houston, McAllen and San Marcos, Texas $4,761,806,000 $2,196,569,000 $4,120,973,000 United States National Bank of Galveston Galveston, Texas 147,229,000 55,467,000 133,143,000
Services Offered by the Cullen/Frost Subsidiary Banks - ----------------------------------------------------- Commercial Banking The subsidiary banks provide commercial services for corporations and other business clients. Loans are made for a wide variety of purposes, including interim construction financing on industrial and commercial properties and financing on equipment, inventories, accounts receivable, leverage buyouts and recapitalizations and turnaround situations. Frost Bank provides financial services to business clients on both a national and international basis. Consumer Services The subsidiary banks provide a full range of consumer banking services, including checking accounts, savings programs, automated teller machines, installment and real estate loans, drive-in and night deposit services, safe deposit facilities, credit card services and discount brokerage services. International Banking Frost Bank provides international banking services to customers residing in or dealing with businesses located in Mexico. Such services consist of accepting deposits (in United States dollars only), making loans (in United States dollars only), issuing letters of credit, handling foreign collections, transmitting funds and, to a limited extent, dealing in foreign exchange. Reference is made to pages 20 and 28 of the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31, 1996, which pages are incorporated herein by reference. Trust Services The subsidiary banks provide a wide range of trust, investment, agency and custodial services for individual and corporate clients. These services include the administration of estates and personal trusts and the management of investment accounts for individuals, employee benefit plans and charitable foundations. At December 31, 1996, trust assets with a market value of approximately $8.1 billion were being administered by the subsidiary banks. These assets were comprised of discretionary assets of $4.2 billion and non- discretionary assets of $3.9 billion. Correspondent Banking Frost Bank acts as correspondent for approximately 327 financial institutions, primarily banks in Texas. These banks maintain deposits with Frost Bank, which offers to the correspondents a full range of services including check clearing, transfer of funds, loan participations, and securities custody and clearance. Discount Brokerage Frost Brokerage Services was formed in March 1986 to provide discount brokerage services and perform other transactions or operations related to the sale and purchase of securities of all types. Frost Brokerage Services is a subsidiary of Frost Bank. Services Offered by the Cullen/Frost Non-Banking Subsidiaries - ------------------------------------------------------------- Main Plaza Corporation ("Main Plaza") is a wholly owned non-banking subsidiary. Main Plaza occasionally makes loans to qualified borrowers. Loans are funded with borrowings against Cullen/Frost's current cash or borrowings against credit lines. Daltex General Agency, Inc. ("Daltex"), a wholly owned non-banking subsidiary, is a managing general insurance agency. Daltex provides vendor's single interest insurance. Competition - ----------- The subsidiary banks encounter intense competition in their commercial banking businesses, primarily from other banks located in their respective service areas. The subsidiary banks also compete with insurance, finance and mortgage companies, savings and loan institutions, credit unions, money market funds and other financial institutions. In the case of some larger customers, competition exists with institutions in other major metropolitan areas in Texas and in the remainder of the United States, some of which are larger than the Cullen/Frost subsidiary banks in terms of capital, resources and personnel. Supervision and Regulation - -------------------------- Cullen/Frost Cullen/Frost is a legal entity separate and distinct from its bank subsidiaries and is a registered bank holding company under the BHC Act. The BHC Act generally prohibits Cullen/Frost from engaging in any business activity other than banking, managing and controlling banks, furnishing services to a bank which it owns and controls or engaging in non-banking activities closely related to banking. As a bank holding company, Cullen/Frost is primarily regulated by the Federal Reserve Board which has established guidelines with respect to the maintenance of appropriate levels of capital and payment of dividends by bank holding companies. Cullen/Frost is required to obtain prior approval of the Federal Reserve Board for the acquisition of more than five percent of the voting shares or certain assets of any company (including a bank) or to merge or consolidate with another bank holding company. The Federal Reserve Act and the Federal Deposit Insurance Act ("FDIA") impose restrictions on loans by the subsidiary banks to Cullen/Frost and certain of its subsidiaries, on investments in securities thereof and on the taking of such securities as collateral for loans. Such restrictions generally prevent Cullen/Frost from borrowing from the subsidiary banks unless the loans are secured by marketable obligations. Further, such secured loans, other transactions, and investments by each of such bank subsidiaries are limited in amount as to Cullen/Frost or to certain other subsidiaries to ten percent of the lending bank subsidiary's capital and surplus and as to Cullen/Frost and all such subsidiaries to an aggregate of 20 percent of the lending bank subsidiary's capital and surplus. Under Federal Reserve Board policy, Cullen/Frost is expected to act as a source of financial strength to its banks and to commit resources to support such banks in circumstances where it might not do so absent such policy. In addition, any loans by Cullen/Frost to its banks would be subordinate in right of payment to deposits and to certain other indebtedness of its banks. Subsidiary Banks The two subsidiary national banks are organized as national banking associations under the National Bank Act and are subject to regulation and examination by the Office of the Comptroller of the Currency (the "Comptroller of the Currency"). Federal and state laws and regulations of general application to banks have the effect, among others, of regulating the scope of the business of the subsidiary banks, their investments, cash reserves, the purpose and nature of loans, collateral for loans, the maximum interest rates chargeable on loans, the amount of dividends that may be declared and required capitalization ratios. Federal law imposes restrictions on extensions of credit to, and certain other transactions with, Cullen/Frost and other subsidiaries, on investments in stock or other securities thereof and on the taking of such securities as collateral for loans to other borrowers. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, Frost Bank and United States National Bank of Galveston ("U.S. National Bank") have registered with the Comptroller of the Currency as transfer agents and are subject to certain reporting requirements of and regulatory control by the Comptroller of the Currency. The bond department of Frost Bank is subject to regulation under the Texas Securities Act. The Comptroller of the Currency with respect to Cullen/Frost's bank subsidiaries has authority to prohibit a bank from engaging in what, in such agency's opinion, constitutes an unsafe or unsound practice in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that such agency could claim that the payment of dividends or other payments might, under some circumstances, be such an unsafe or unsound practice. The principal source of Cullen/Frost's cash revenues is dividends from its bank subsidiaries, and there are certain limitations on the payment of dividends to Cullen/Frost by such bank subsidiaries. The prior approval of the Comptroller of the Currency is required if the total of all dividends declared by a national bank in any calendar year would exceed the bank's net profits, as defined, for that year combined with its retained net profits for the preceding two calendar years less any required transfers to surplus. In addition, a national bank may not pay dividends in an amount in excess of its undivided profits less certain bad debts. Although not necessarily indicative of amounts available to be paid in future periods, Cullen/Frost's subsidiary banks had approximately $6,476,000 available for payment of dividends, without prior regulatory approval, at December 31, 1996. Capital Adequacy Bank regulators have adopted risk-based capital guidelines for bank holding companies and banks. The minimum ratio of qualifying total capital to risk-weighted assets (including certain off-balance sheet items) is 8 percent. At least half of the total capital is to be comprised of common stock, retained earnings, perpetual preferred stocks, minority interests and for bank holding companies, a limited amount of qualifying cumulative perpetual preferred stock, less certain intangibles including goodwill ("Tier 1 capital"). The remainder ("Tier 2 capital") may consist of other preferred stock, certain other instruments, and limited amounts of subordinated debt and the allowance for loan and lease loss. In addition, bank regulators have established minimum leverage ratio (Tier 1 capital to average total assets) guidelines for bank holding companies and banks. These guidelines provide for a minimum leverage ratio of 3 percent for bank holding companies and banks that meet certain specified criteria, including that they have the highest regulatory rating. All other banking organizations will be required to maintain a leverage ratio of 3 percent plus an additional cushion of at least 100 to 200 basis points. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a "Tangible Tier 1 Leverage Ratio" in evaluating proposals for expansion or new activities. The Tangible Tier 1 Leverage Ratio is the ratio of Tier 1 capital, less intangibles not deducted from Tier 1 capital, to average total assets. The bank regulators have not advised Cullen/Frost or any bank subsidiary of any specific minimum leverage ratio applicable to it. For information concerning Cullen/Frost's capital ratios, see the discussion under the caption "Capital" on page 28 and Footnote L "Capital" on page 43 of the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31, 1996, which discussions are incorporated herein by reference. FDICIA The Federal Deposit Insurance Corporation Improvements Act of 1991 ("FDICIA"), among other things, requires the Federal banking agencies to take "prompt corrective action" in respect of depository institutions that do not meet minimum capital requirements. FDICIA established five capital tiers: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized". Under the final rules adopted by the Federal banking regulators relating to these capital tiers, an institution is deemed to be: well capitalized if the institution has a total risk-based capital ratio of 10.0 percent or greater, a Tier 1 risk- based capital ratio of 6.0 percent or greater, and a leverage ratio of 5.0 percent or greater, and the institution is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure; adequately capitalized if the institution has a total risk-based capital ratio of 8.0 percent or greater, a Tier 1 risk-based capital ratio of 4.0 percent or greater, and a leverage ratio of 4.0 percent or greater (or a leverage ratio of 3.0 percent for bank holding companies which meet certain specified criteria, including having the highest regulatory rating); undercapitalized if the institution has a total risk-based capital ratio that is less than 8.0 percent, a Tier 1 risk-based capital ratio less than 4.0 percent or a leverage ratio less than 4.0 percent (or a leverage ratio less than 3.0 percent if the institution is rated composite 1 in its most recent report of examination, subject to appropriate Federal banking agency guidelines); significantly undercapitalized if the institution has a total risk-based capital ratio less than 6.0 percent, a Tier 1 risk-based capital ratio less than 3.0 percent, or a leverage ratio less than 3.0 percent; and critically undercapitalized if the institution has a ratio of tangible equity to total assets equal to or less than 2.0 percent. At December 31, 1996, the two subsidiaries of Cullen/Frost that are insured depository institutions -- Frost Bank and U.S. National Bank -- were considered "well capitalized". At December 31, 1996, the subsidiary banks capital ratios were as follows: Tier 1 Total Leverage Risk Based Risk Based Ratio Capital Ratio Capital Ratio -------- -------------- ------------- Frost Bank 5.76% 9.78% 11.03% U. S. National Bank 7.11 14.43 15.72 FDICIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5 percent of the depository institution's total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. "Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized", requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized" institutions are subject to the appointment of a receiver or conservator. FDICIA also contains a variety of other provisions that affect the operations of Cullen/Frost, including reporting requirements, regulatory standards for real estate lending, "truth in savings" provisions, and the requirement that a depository institution give 90 days' prior notice to customers and regulatory authorities before closing any branch. The Federal regulatory agencies have issued standards establishing loan-to-value limitations on real estate lending. These standards have not had a significant effect on Cullen/Frost and are not expected to have a significant effect in the future. Any loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a priority of payment. Deposit Insurance - ----------------- Cullen/Frost's subsidiary banks are subject to FDIC deposit insurance assessments and to certain other statutory and regulatory provisions applicable to FDIC-insured depository institutions. The risk-based assessment system imposes insurance premiums based upon a matrix that takes into account a bank's capital level and supervisory rating. For the second half of 1995, the FDIC assessment rate imposed on banks ranged from four cents for each $100 of domestic deposits (for well capitalized banks in the highest of three supervisory rating categories) to 31 cents (for inadequately capitalized banks in the lowest of the three supervisory rating categories). This was a decrease from the previous assessment range of 23 cents to 31 cents for those respective categories for each $100 of domestic deposits. For 1996, the FDIC Board reduced the insurance premiums to range from zero, with a minimum of $2,000 per year for banks in the lowest risk category, to 27 cents for each $100 of domestic deposits. However, legislative action enacted in 1996 provides for assessments on banks (based on deposit levels) to pay interest on Financing Corporation (FICO) bonds, the proceeds of which were used in the bailout of the Savings and Loan industry in the 1980's. For each of the three years beginning in 1997, the assessment on banks is expected to be approximately 1.3 cents for each $100 of qualified deposits. Based on year-end deposit levels, the Corporations 1997 expense would be approximately $500,000. A depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989, in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled, FDIC-insured depository institution in danger of default. "Default" is defined generally as the appointment of a conservator or receiver, and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. Depositor Preference - -------------------- Deposits and certain claims for administrative expenses and employee compensation against an insured depository institution are afforded priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the "liquidation or other resolution" of such an institution by any receiver. Acquisitions - ------------ The BHC Act generally limits acquisitions by Cullen/Frost to commercial banks and companies engaged in activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. Cullen/Frost's direct activities are generally limited to furnishing to its subsidiaries services that qualify under the "closely related" and "proper incident" tests. Prior Federal Reserve Board approval is required under the BHC Act for new activities and acquisitions of most nonbanking companies. The BHC Act, the Federal Bank Merger Act, and the Texas Banking Code regulate the acquisition of commercial banks. The BHC Act requires the prior approval of the Federal Reserve Board for the direct or indirect acquisition of more than five percent of the voting shares of a commercial bank or bank holding company. With respect to Cullen/Frost's subsidiary banks, the approval of the Comptroller of the Currency is required for branching, purchasing the assets of other banks and for bank mergers in which the continuing bank is a national bank. In reviewing bank acquisition and merger applications, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, and the applicant's record under the Community Reinvestment Act and fair housing laws. The Corporation regularly evaluates acquisition opportunities and regularly conducts due diligence activities in connection with possible acquisitions. As a result, acquisition discussions and, in some cases negotiations, regularly take place and future acquisitions could occur. Interstate Banking and Branching Legislation - -------------------------------------------- The Riegle-Neal Interstate Branching Efficiency Act of 1994 ("IBBEA"), authorizes interstate acquisitions of banks and bank holding companies without geographic limitation beginning one year after enactment. In addition, beginning June 1, 1997, IBBEA authorizes a bank to merge with a bank in another state as long as neither of the states has opted out of interstate branching between the date of enactment of IBBEA and May 31, 1997. IBBEA further provides that states may enact laws permitting interstate bank merger transactions prior to June 1, 1997. A bank may establish a de novo branch in a state in which the bank does not maintain a branch if the state expressly permits de novo branching. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where any bank involved in the merger transaction could have established or acquired branches under applicable federal or state law. A bank that has established a branch in a state through de novo branching may establish and acquire additional branches in such state in the same manner and to the same extent as a bank having a branch in such state as a result of an interstate merger. If a state opts out of interstate branching within the specified time period, no bank in any other state may establish a branch in the opting out state, whether through an acquisition or de novo. On August 28, 1995, Texas enacted legislation opting out of interstate branching. Regulatory Economic Policies - ---------------------------- The earnings of the subsidiary banks are affected not only by general economic conditions but also by the policies of various governmental regulatory authorities. The Federal Reserve Board regulates the supply of credit in order to influence general economic conditions, primarily through open market operations in United States government obligations, varying the discount rate on financial institution borrowings, varying reserve requirements against financial institution deposits and restricting certain borrowings by such financial institutions and their subsidiaries. The deregulation of interest rates has had and is expected to continue to have an impact on the competitive environment in which the subsidiary banks operate. Governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. However, Cullen/Frost cannot accurately predict the nature or extent of any effect such policies may have on its future business and earnings. Statistical Information - ----------------------- Statistical and other information is included on pages 12 through 29, pages 53 and 54 and pages 56 through 59 of the Cullen/Frost Annual Report to Shareholders for the year ended December 31, 1996, which information is incorporated herein by reference. Employees - --------- At December 31, 1996, Cullen/Frost employed 2,306 full-time equivalent employees. Employees of Cullen/Frost enjoy a variety of employee benefit programs, including a retirement plan, 401(k) stock purchase plans, various comprehensive medical, accident and group life insurance plans and paid vacations. Cullen/Frost considers its employee relations to be good. Executive Officers of the Registrant - ------------------------------------ The names, ages, recent business experience and positions or offices held by each of the executive officers during 1996 of Cullen/Frost are as follows: Name and Positions or Offices Age as of 12/31/96 Recent Business Experience - ----------------------------- ------------------ -------------------------- T.C. Frost 69 Officer and director of Senior Chairman of the Board, Frost Bank since 1950. Chief Executive Officer, and Chairman of the Board Director of Cullen/Frost 1973 to October 1995. Member of the Executive Committee of Cullen/Frost 1973 to present. Chief Executive Officer of Cullen/Frost July 1977 to present. Senior Chairman of Cullen/Frost from October 1995 to present. Richard W. Evans, Jr. 50 Officer of Frost Bank Chairman of the Board, Chief since 1973. Executive Operating Officer, and Director Vice President of Frost Bank from 1978 to April 1985. President of Frost Bank from April 1985 to August 1993. Chairman of the Board and Chief Executive Officer of Frost Bank from August 1993 to present. Director and Member of the Executive Committee of Cullen\Frost from August 1993 to present. Chairman of the Board and Chief Operating Officer of Cullen/Frost from October 1995 to present. Robert S. McClane 57 Officer of Frost Bank President and Director since 1962. Senior Vice President of Cullen/Frost from November 1973 to April 1978. Secretary from May 1973 to April 1985. Executive Vice President from April 1978 to April 1985. Chief Administrative Officer of Cullen/Frost from 1993 to October 1995. President and Director of Cullen/Frost from April 1985 to present. Phillip D. Green 42 Officer of Frost Bank Executive Vice President, since July 1980. Vice and Chief Financial Officer President and Controller of Frost Bank from January 1981 to January 1983. Senior Vice President and Controller of Frost Bank from January 1983 to July 1985. Senior Vice President and Treasurer of Cullen/Frost from July 1985 to April 1989. Executive Vice President and Treasurer of Cullen/Frost from May 1989 to October 1995. Executive Vice President and Chief Financial Officer of Cullen/Frost from January 1996 to present. Diane Jack, age 48, has been an officer of Frost Bank since 1984; Secretary of Cullen/Frost from October 1993 to present. There are no arrangements or understandings between any executive officer of Cullen/Frost and any other person pursuant to which he was or is to be selected as an officer. Item 2. PROPERTIES - ------------------- The executive offices of Cullen/Frost, as well as the principal banking quarters of Frost Bank, are housed in both a 21-story office tower and a nine- story office building located on approximately 3.5 acres of land in downtown San Antonio. Cullen/Frost and Frost Bank lease approximately 50 percent of the office tower. The nine-story office building was purchased in April 1994. Frost Bank also leases space in a seven-story parking garage adjacent to the banking quarters. In June 1987 Frost Bank consummated the sale of its office tower and leased back a portion of the premises under a 13-year primary lease term with options allowing for occupancy up to 50 years. The Bank also sold its related parking garage facility and leased back space in that structure under a 12-year primary lease term with options allowing for occupancy up to 50 years. The subsidiary bank located in Galveston is housed in facilities which, together with tracts of adjacent land used for parking and drive-in facilities, are either owned or leased by the subsidiary bank. Item 3. LEGAL PROCEEDINGS - -------------------------- Certain subsidiaries of Cullen/Frost are defendants in various matters in litigation which have arisen in the ordinary course of conducting a commercial banking business. In the opinion of management, the judicial disposition of such pending litigation will not have a material effect on Cullen/Frost's consolidated financial position. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ None. PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS - ----------------------------------------------------------------------------- The information called for by Item 5 is incorporated herein by reference to "Common Stock Market Prices and Dividends" on page 55 and "Note K-Dividends" on page 43 of the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31, 1996. Item 6. SELECTED FINANCIAL DATA - -------------------------------- The information called for by Item 6 is incorporated herein by reference to "Selected Financial Data" on page 56 and "Consolidated Statements of Operations" and "Consolidated Average Balance Sheets" on pages 58 through 59 of the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31, 1996. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------ RESULTS OF OPERATIONS ---------------------- The information called for by Item 7 is incorporated herein by reference to "Financial Review" on pages 12 through 29, "Consolidated Statements of Operations" and "Consolidated Average Balance Sheets" on pages 57 through 59 of the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31, 1996. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- The information called for by Item 8 is incorporated herein by reference to the consolidated financial statements and report of independent auditors included on pages 30 through 52 and "Quarterly Results of Operations" on page 55, of the Cullen/Frost Annual Report to Shareholders for the Year Ended December 31, 1996. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------ FINANCIAL DISCLOSURE --------------------- None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ The information regarding directors and executive officers called for by Item 10 is incorporated herein by reference to Cullen/Frost's Proxy Statement for its Annual Meeting of Shareholders to be held May 28, 1997. The additional information regarding executive officers called for by Item 10 is included in Part I, Item 1 of this document under the heading "Executive Officers of the Registrant". Item 11. EXECUTIVE COMPENSATION - -------------------------------- The information called for by Item 11 is incorporated herein by reference to Cullen/Frost's Proxy Statement for its Annual Meeting of Shareholders to be held May 28, 1997. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ The information called for by Item 12 is incorporated herein by reference to Cullen/Frost's Proxy Statement for its Annual Meeting of Shareholders to be held May 28, 1997. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- The information called for by Item 13 is incorporated herein by reference to Cullen/Frost's Proxy Statement for its Annual Meeting of Shareholders to be held May 28, 1997. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- (a) The following documents are filed as part of this Annual Report on Form 10-K: 1. Financial Statements -- Reference is made to Part II, Item 8, of this Annual Report on Form 10-K. 2. The Financial Statement Schedules are omitted, as the required information is not applicable. 3. Exhibits -- The following exhibits are filed as a part of this Annual Report on Form 10-K: Exhibit Number ------- 3.1 Restated Articles of Incorporation, as amended (1988 Form S-8, Exhibit 4(a))(2) 3.2 Amended By-Laws of Cullen/Frost Bankers, Inc. (1995 Form 10-K/A, Exhibit 3.2)(11) 4.1 Shareholder Protection Rights Agreement dated as of August 1, 1996 between Cullen/Frost Bankers, Inc. and The Bank of New York, as Rights Agent (1996 Form 8-A12G/A, Exhibit 1)(13) 10.1 1983 Non-qualified Stock Option Plan, as amended (1989 Form S-8, Exhibit 4(g))(4) 10.2 Restoration of Retirement Income Plan for Participants in the Retirement Plan for Employees of Cullen/Frost Bankers, Inc. and its Affiliates (as amended and restated)(1988 Form 10-K, Exhibit 10.4)(3)* 10.3 Contract of Sale, dated June 9, 1987, between The Frost National Bank of San Antonio and Tower Investors, Ltd. for the sale of the Frost Bank Tower (1987 Form 10-K, Exhibit 10.10)(1) 10.4 Master Lease, dated June 9, 1987, between The Frost National Bank of San Antonio and Tower Investments, Ltd. for the lease of the Frost Bank Tower (1987 Form 10-K, Exhibit 10.11)(1) 10.5 Form of Revised Change-In-Control Agreements with four Executive Officers (1989 Form 10-K, Exhibit 10.13(a))(6)* 10.6 1988 Non-qualified Stock Option Plan (1989 Form S-8, Exhibit 4(g))(5) 10.7 The 401(k) Stock Purchase Plan for employees of Cullen/Frost Bankers, Inc. and its Affiliates (1990 Form S-8, Exhibit 4(g))(7)* 10.8 1991 Thrift Incentive Stock Purchase Plan for Employees of Cullen/Frost Bankers, Inc. and its Affiliates (1991 Form S-8, Exhibit 4(g))(8)* 10.9 Cullen/Frost Bankers, Inc. Restricted Stock Plan (1992 Form S-8, Exhibit 4(d))(9)* 10.10 Cullen/Frost Bankers, Inc. 1992 Stock Plan (1992 Form S-8, Exhibit 4(d))(10) 10.11 Cullen/Frost Bankers, Inc. Supplemental Executive Retirement Plan (1994 Form 10-K, Exhibit 10.13)(12) 10.12 Form of Revised Change-In-Control Agreements with one Executive Officer (1994 Form 10-K, Exhibit 10.14)(12) 10.13 Retirement agreement with one Executive Officer 11 Statement re: computation of earnings per share 13 The Cullen/Frost 1996 Annual Report to Shareholders for the Year Ended December 31, 1996, (furnished for the information of the Commission and not deemed to be "filed" except for the portion expressly incorporated by reference) 19.1 Annual Report on Form 11-K for the Year Ended December 31, 1996, for the 1991 Thrift Incentive Stock Purchase Plan (filed pursuant to Rule 15d-21 of the Securities and Exchange Act of 1934)(14) 19.2 Annual Report on Form 11-K for the Year Ended December 31, 1996, for the 401(k) Stock Purchase Plan (filed pursuant to Rule 15d-21 of the Securities and Exchange Act of 1934)(14) 21 Subsidiaries of Cullen/Frost 23 Consent of Independent Auditors 24 Power of Attorney * Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K. (b) Reports on Form 8-K -- No such reports were filed during the quarter ended December 31, 1996. ______________________ (1) Incorporated herein by reference to the designated Exhibits to the Cullen/Frost Annual Report on Form 10-K for the Year Ended December 31, 1987 (File No. 0-7275) (2) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Report on Form S-8 filed June 24, 1988 (File No. 33-22758) (3) Incorporated herein by reference to the designated Exhibits to the Cullen/Frost Annual Report on Form 10-K for the Year Ended December 31, 1988 (File No. 0-7275) (4) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Report on Form S-8 filed September 5, 1989 (File No. 33-30776) (5) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Report on Form S-8 filed September 5, 1989 (File No. 33-30777) (6) Incorporated herein by reference to the designated Exhibits to the Cullen/Frost Annual Report on Form 10-K for the Year Ended December 31, 1989 (File No. 0-7275) (7) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Report on Form S-8 filed October 31, 1990 (File No. 33-37500) (8) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Report on Form S-8 filed March 18, 1991 (File No. 33-39478) (9) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Report on Form S-8 filed October 20, 1992 (File No. 33-53492) (10) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Report on Form S-8 filed October 23, 1992 (File No. 33-53622) (11) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Annual Report on Form 10-K for the Year Ended December 31, 1994 (File No. 0-7275) (12) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Annual Report on Form 10-K for the Year Ended December 31, 1994 (File No. 0-7275) (13) Incorporated herein by reference to the designated Exhibits to Cullen/Frost's Current Report on Form 8-A12G/A dated August 1, 1996 (File No. 0-7275) (14) To be filed as an amendment. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 28, 1997 CULLEN/FROST BANKERS, INC. (Registrant) By:/s/ Phillip D. Green ------------------------ Phillip D. Green Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 28, 1997 Signatures Title Date ---------- ----- ----- Senior Chairman of the Board and Director (Principal Executive T.C. FROST* Officer) - ------------------------ (T.C. Frost) Chairman of the Board RICHARD W. EVANS, Jr* and Director - -------------------------- (Richard W. Evans, Jr.) ROBERT S. McCLANE* President and Director - ------------------------ (Robert S. McClane) ISAAC ARNOLD, JR.* Director - ------------------------ (Isaac Arnold, Jr.) ROYCE S. CALDWELL* Director - ------------------------ (Royce S. Caldwell) RUBEN R. CARDENAS* Director - ------------------------ (Ruben R. Cardenas) HENRY E. CATTO* Director - ------------------------ (Henry E. Catto) Signatures Title Date ---------- ----- ----- HARRY H. CULLEN* Director - ------------------------ (Harry H. Cullen) ROY H. CULLEN Director - ------------------------ (Roy H. Cullen) EUGENE H. DAWSON, SR.* Director - ------------------------ (Eugene H. Dawson, Sr.) Director - ------------------------ (Ruben M. Escobedo) W.N. FINNEGAN III* Director - ------------------------ (W.N. Finnegan III) JAMES W. GORMAN, JR.* Director - ------------------------ (James W. Gorman, Jr.) JAMES L. HAYNE* Director - ------------------------ (James L. Hayne) RICHARD M. KLEBERG, III* Director - ------------------------ (Richard M. Kleberg, III) IDA CLEMENT STEEN* Director - ------------------------ (Ida Clement Steen) CURTIS VAUGHAN, JR.* Director - ------------------------ (Curtis Vaughan, Jr.) MARY BETH WILLIAMSON* Director - ------------------------ (Mary Beth Williamson) Executive Vice President *By:/s/ Phillip D. Green and Chief Financial Officer March 28, 1997 - -------------------------- (Phillip D. Green) [as Attorney-in-Fact for the persons indicated] EXHIBIT INDEX Exhibit Number Description of Exhibits - ------------------------------------------ 10.13 Retirement agreement with one Executive Officer 11 Statement re: computation of earnings per share 13 The Cullen/Frost 1996 Annual Report to Shareholders for the Year Ended December 31, 1996 (furnished for the information of the Commission and not deemed to be "filed" except for the portion expressly incorporated by reference) 21 Subsidiaries of Cullen/Frost 23 Consent of Independent Auditors 24 Power of Attorney EX-10.13 2 RETIREMENT AGREEMENT WITH ONE EXECUTIVE OFFICER EXHIBIT 10.13 Retirement Agreement With One Executive Officer CULLEN/FROST BANKERS A Family of Texas Banks June 28, 1996 Mr. Robert S. McClane Cullen/Frost Bankers, Inc. 100 West Houston Street San Antonio, Texas 78205 Dear Bob: Cullen/Frost Bankers, Inc., a Texas corporation (the "Company"), hereby acknowledges the significant contributions you have made, and continue to make, to both the Company and the community during your years with the Company. In addition, the Company is excited that you have been elected to serve as the Chairman of The Greater San Antonio Chamber of Commerce for this year and the constructive community relations benefits that will flow to the Company as a result of you serving in such position. Due to the recent reorganization within the bank and your election to retire and enter into the Retirement Plan (as hereinafter defined) effective June 1, 1999, and the Company's desire that you continue to serve as President of the Company until the earlier of the 1997 meeting of the Company's shareholders or June 30, 1997, and, in view of your contributions to and knowledge of the Company and its operations, the Company's desire to be able to call upon you for consulting services and special projects assistance after your term as President has ended and until you enter into the Retirement Plan, this letter agreement, which has been approved by the Compensation and Benefits Committee of the Board of Directors of the Company, sets forth the terms of your employment until your retirement on June 1, 1999: 1. Employment, Consulting Services and Duties. Subject to the ------------------------------------------ terms and conditions of this Agreement, the Company agrees to employ you as its President, and you accept such employment with the Company, from the date hereof until the earlier of the 1997 meeting of the Company's shareholders or June 30, 1997 (the "Initial Term"). During this Initial Term it is understood that you will be serving as Chairman or Immediate Past-Chairman of The Greater San Antonio Chamber of Commerce and will perform such other duties for the Company as may be assigned and agreed upon between you and the Senior Chairman of the Board. For the period commencing with the expiration of the Initial Term through May 31, 1999 ("Consulting Term"), the Company and you mutually agree that you will be employed by the Company: (a) as a consultant on community and customer relations matters and issues reporting directly to the Senior Chairman of the Board; and (b) as a consultant to work on special projects as may be assigned and agreed upon between you and the Senior Chairman or Chairman of the Board. It is further understood that during calendar year 1997 you will serve, as the immediate past-Chairman of The Greater San Antonio Chamber of Commerce, on the Chamber's Executive Committee thereby continuing to provide constructive community relations benefits to the Company. The Initial Term and the Consulting Term are collectively referred to herein as the "Term." During the Consulting Term, and subject to the provisions of Section 5 hereof, --------- you will be able to pursue other business ventures, activities and investments that are not in conflict with your obligations and duties, as defined herein, as an employee of the Company. During the Consulting Term and until such time as you reach age 70, you will be considered annually by the Board as a candidate for re-election to the Board of the Company and The Frost National Bank; provided, Cullen/Frost Bankers however, that it is understood that whether or not you are nominated and/or re- elected is solely and exclusively within the discretion of the Board. If you are nominated and elected to serve as a member of either of such boards of directors, you shall not be compensated in your capacity as a director so long as you are receiving the monthly base salary set forth in Section 2.1 hereof. ----------- 2. Compensation and Benefits. ------------------------- 2.1 Monthly Base Salary. For all services rendered to the ------------------- Company during the Term of this Agreement, the Company shall pay you a salary of $25,000 per month, payable in accordance with the usual payroll practice of the Company, less all required deductions. 2.2 Bonus. As additional compensation for services rendered ----- under this Agreement, Employee shall receive a bonus of $90,000 to be paid not later than March 31, 1997. 2.3 Benefits. You shall, in addition to the compensation -------- provided for herein, be entitled to the following additional benefits during the Term of this Agreement: (a) Medical, Health, Life and Disability Benefits. You shall be --------------------------------------------- entitled to receive all medical, health, life and disability benefits that may, from time to time, be provided by the Company to senior management of the Company as a group. (b) Other Benefits. In addition to the normal benefits incident -------------- to employment with the Company, you shall also be entitled to receive the following additional benefits: (i) a car allowance of $6,000 per annum; (ii) payment of dues for membership to the Argyle and San Antonio Country Club; and (iii) payment for security at your residence. 2.4 Stock Options. ------------- (a) Release of Unvested Options. As of the effective date of --------------------------- this Agreement, you hold the following nonqualified stock options granted by the Company subject to the terms of the applicable plan and option award agreements (collectively, the "Unvested Options"): (i) 6,000 options granted on October 20, 1994, which are scheduled to vest on October 20, 1999; and (ii) 6,800 options granted on September 28, 1995, 3,400 of which are scheduled to vest on September 28, 1999 and 3,400 of which are scheduled to vest on September 28, 2000. You have acknowledged that, in the absence of a change of control of the Company, such Unvested Options shall, by their terms, expire unvested as of your retirement on June 1, 1999. In exchange for good and valuable consideration provided under this Agreement, you have agreed and do hereby forfeit and release the Unvested Options immediately upon the execution of this Agreement. -2- Cullen/Frost Bankers (b) Grant. In consideration for past and future services to the ----- Company, you will receive a nonqualified stock option, subject to the terms of the applicable plan and option award agreement as approved by the Company's Compensation and Benefits Committee on June 26, 1996, of 15,000 options which will be scheduled to vest on May 31, 1999, with a ten (10) year exercise period from the date of grant. 2.5 Reimbursement of Expenses. During the Initial Term, the ------------------------- Company shall reimburse you for all expenses reasonably incurred by you in conjunction with the rendering of services at the Company's request, including such entertainment, travel and other related incidental expenses reasonably incurred by you in conjunction with your duties as Chairman or Immediate Past- Chairman of the Greater San Antonio Chamber of Commerce or in support of customer relations activities for the benefit of the Company, provided that such expenses are incurred and submitted for reimbursement, with appropriate receipts and itemization, in accordance with the prevailing practice and policy of the Company. During the Consulting Term, the prior authorization or approval by the Senior Chairman or Chairman of the Company shall also be required for expense reimbursement. 2.6 Office. While employed as President during the Initial ------ Term, you will continue to occupy your current office and receive secretarial and other office support appropriate to your position. Thereafter, until the earlier of such time as you no longer request or regularly utilize such office or you reach age 70, you will be provided with a private office and appropriate office and secretarial support. 3. Termination. ----------- 3.1 Termination For Cause. Your employment under this Agreement --------------------- may be terminated by the Company for "Cause" (hereinafter defined) upon written notice thereof given by the Company to you. In the event of termination pursuant to this Section 3.1, the Company shall pay you your monthly base ----------- salary (subject to standard deductions) earned pro rata to the date of such termination and the Company shall have no further obligations to you hereunder. Termination by the Company of your employment for Cause shall mean termination upon (a) the willful and continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness) after a demand for substantial performance is delivered to you by the Senior Chairman or the Chairman of the Board which specifically identifies the manner in which such executive believes that you have not substantially performed your duties, or (b) the willful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For purposes of this Section 3.1, no ----------- act, or failure to act, on your part shall be considered willful unless done, or omitted to be done, by you in bad faith and without reasonable belief that your action or omission was in, or not opposed to, the best interest of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based on advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly -3- Cullen/Frost Bankers adopted by the affirmative vote of not less than three quarters of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of the conduct set forth above in (a) or (b) of this Section 3.1 and specifying the particulars thereof in ----------- detail. 3.2 Termination Upon Death. This Agreement shall terminate upon ---------------------- your death. 3.3 Termination Upon Disability. In the event you become unable --------------------------- to perform the essential functions of your duties hereunder, with or without reasonable accommodation, on account of illness, disability or other reason whatsoever for a period of more than 180 consecutive days, the Company may, upon notice to you, terminate this Agreement. In the event of termination pursuant to this Section 3.3, you shall be entitled to payment of a monthly ----------- amount, that when added to the monthly amount to be received under all your short-term and long-term disability benefits, is equal to your monthly base salary. You shall receive such amount for the then remaining portion of the Term of employment pursuant to this Agreement. 3.4 Survival of Provisions. The covenants and provisions of ---------------------- Section 5 and Section 8 hereof shall survive any termination of this Agreement - --------- --------- regardless of how such termination may be brought about. 4. Retirement Plan. Notwithstanding the foregoing, upon the --------------- occurrence of the earlier of (i) the termination of this Agreement on May 31, 1999 (i.e., the last day of the Term), or (ii) the termination of this Agreement for any reason other than for death or Cause (as defined in Section ------- 3.1), you shall enter into retirement pursuant to the Retirement Plan for - --- Employees of Cullen/Frost Bankers, Inc. and its Affiliates (or any successor or substitute defined benefit pension plan or plans of the Company) (the "Retirement Plan"). 5. Confidential Information. You agree that during and ------------------------ subsequent to your Term of employment with the Company, you will not at any time communicate or disclose to any unauthorized person without the written consent of the Senior Chairman or Chairman of the Company, any proprietary process or information of the Company, or any subsidiary or related entity, or other confidential information concerning their business, financial affairs, products, suppliers or customers which, if disclosed, would have a material adverse effect upon the business or operation of the Company and its subsidiaries, taken as a whole; it being understood, however, that the obligations of this Section 5 shall not apply to the extent that the aforesaid --------- matters (a) are disclosed in circumstances where you are legally required to do so or (b) become generally known to and available for use by the public otherwise than by your wrongful act or omission. The intent of this Section 5 --------- is not to create a non-compete agreement but to protect the rights of the Company as provided above. -4- Cullen/Frost Bankers 6. Successors; Binding Agreement. ----------------------------- 6.1 Upon your written request, the Company will seek to have any Successor (as hereinafter defined), by agreement in form and substance satisfactory to you, assent to the fulfillment by the Company of its obligations under this Agreement. Failure of such person or entity to furnish such assent by the later of (a) three business days prior to the time such person or entity becomes a Successor or (b) two business days after such person or entity receives a written request to so assent shall constitute a termination by the Company without cause and shall entitle you to payment within 30 days of such termination of a lump sum equal to (without discounting to present value) your monthly base salary under Section 2.1 hereof for the then remaining portion of the Term of employment pursuant to this Agreement and immediately to the benefits provided in Section 4. In addition, the --------- retirement benefits you shall receive under Section 4 hereof shall be those --------- benefits you would have been entitled to had you remained in the employ of the Company until the expiration of the Term of this Agreement. For purposes of this Agreement, Successor shall mean any person or entity that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase of the Company's securities entitled to vote in the election of directors, all or substantially all of its assets, or otherwise. 6.2 For purposes of this Agreement, the Company shall include any corporation or other entity which is the surviving or continuing entity in respect of any merger, consolidation or form of business combination in which the Company ceases to exist. 6.3. This Agreement shall inure to the benefit of and be enforceable by you and your personal or legal representatives and successors in interest under this Agreement. 7. Taxes. The Company may withhold from any amounts payable ----- under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling. 8. Arbitration. Any claim, dispute or controversy of any nature ----------- whatsoever, including but not limited to tort claims or contract disputes, between the parties to this Agreement or their respective heirs, executors, administrators, legal representatives, successors and assigns, as applicable, arising out of or relating to your employment or the termination of your employment with the Company and/or the terms and conditions of this Agreement, including the implementation, applicability and interpretation thereof, shall be resolved as follows: upon the written request of one party served upon the other, any such claim, dispute or controversy shall be submitted to and settled by arbitration in accordance with the provisions of the Federal Arbitration Act, 9 U.S.C. Sections 1-15, as amended; provided, however, that with respect to the provisions of Section 5 of this Agreement dealing with confidential --------- information, the Company reserves the right to petition a court directly for injunctive or other relief. If arbitration is requested, each of the parties to this Agreement shall appoint one person as an arbitrator to hear and determine any such disputes, and if they should be unable to agree, then the two arbitrators shall choose a third arbitrator from a panel made up of -5- Cullen/Frost Bankers experienced arbitrators selected pursuant to the procedures of the American Arbitration Association (the "AAA") and, once chosen, the third arbitrator's decision shall be final, binding and conclusive upon the parties to this Agreement. Each party shall be responsible for the fees and expenses of its arbitrator and the fees and expenses of the third arbitrator shall be shared equally by the parties. The terms of the commercial arbitration rules of AAA shall apply except to the extent they conflict with the provisions of this paragraph. It is further agreed that any of the parties hereto may petition the United States District Court for the Western District of Texas, San Antonio Division, for a judgment to be entered upon any award entered through such arbitration proceedings. 9. Release. You release, dismiss, acquit and discharge the ------- Company and its affiliates, and their divisions, officers, directors, agents, employees, consultants, independent contractors, attorneys, advisers, successors and assigns, jointly and severally, from any and all claims, known or unknown, which you, your heirs, successors and assigns have or may have against any of such parties, whether denominated claims, demands, causes of action, obligations, damages or liabilities arising from any and all bases, however denominated, including but not limited to claims of discrimination under the Age Discrimination in Employment Act; Title VII of the Civil Rights Act of 1964, as amended; the Civil Rights Act of 1991; 42 U.S.C. Section 1981, Section 1985; Americans With Disabilities Act; Equal Pay Act; anti-discrimination laws; libel; slander; defamation; Fair Labor Standards Act; Employee Retirement Income Security Act of 1974; Texas Commission on Human Rights Act; art. 5221k, Tex. Rev. Civ. Stat. Ann. (Vernon Supp. 1985) or any other U.S. federal, state or local law including, statutory, common law or regulations. This release relates to claims arising from and during your relationship with the Company and its affiliates or as a result of the termination of such relationship, specifically including but not limited to your retirement to be effective June 1, 1999. This release is for any relief, no matter how denominated, including but not limited to wages, back pay, front pay, compensatory damages or punitive damages. You further agree that you will not file or permit to be filed on your behalf any such claim. This release is not intended to apply to the obligations of the Company set forth in this Agreement or to future claims based upon events or occurrences subsequent to the effective date of this Agreement. You expressly acknowledge that the benefits being offered to you in this Agreement constitute consideration for the foregoing release that is in addition to anything of value to which you are already entitled from the Company and its affiliates. 10. Notice. Written notices required or furnished under this ------ Agreement shall be sent to the following addresses: to the Company: Attn: Senior Chairman of the Board Cullen/Frost Bankers, Inc. 100 W. Houston Street P.O. Box 1600 San Antonio, Texas 78296 -6- Cullen/Frost Bankers to you: Robert S. McClane 132 Grant Avenue San Antonio, Texas 78209 Notices shall be effective on the first business day following receipt thereof. Notices sent by mail shall be deemed received on the date of delivery shown on the return receipt. 11. TERMINATION OF PRIOR LETTER AGREEMENTS. THIS AGREEMENT IS -------------------------------------- INTENDED TO REPLACE IN THE ENTIRETY THE LETTER AGREEMENTS DATED NOVEMBER 15, 1994 AND MARCH 2, 1990 (THE "PRIOR AGREEMENTS") REGARDING A CHANGE IN CONTROL OF THE COMPANY. BY MUTUAL AGREEMENT, THE PRIOR AGREEMENTS ARE HEREBY DECLARED NULL AND VOID. THE RESPECTIVE OBLIGATIONS AND THE BENEFITS PROVIDED IN THE PRIOR AGREEMENTS ARE TERMINATED AND OF NO FURTHER EFFECT. 12. Miscellaneous. This Agreement constitutes the entire ------------- understanding between you and the Company and its affiliates with respect to the subject matter hereof, and supersedes all prior understandings, written or oral. The terms of this Agreement may be changed, modified or discharged only by an instrument in writing signed by you and the Senior Chairman or the Chairman of the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Except to the extent that the terms and provisions of this Agreement are governed by Federal law, this Agreement shall be construed in accordance with the laws of the State of Texas. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be original. 13. Representations and Warranties. You warrant that you are ------------------------------ over the age of twenty-one (21) and competent to execute this Agreement; that in executing this Agreement, you are not relying on any statement, representation, advice or counsel of the other party to this Agreement, but are relying on your own judgment and/or that of your independent counsel; and that the Agreement is the result of negotiation between the parties. You agree that you have been encouraged to and have had an opportunity to consult with an attorney of your own choosing regarding the Agreement, that it was executed voluntarily without duress or coercion of any form. You further acknowledge that you have been afforded a period of at least 21 days within which to consider this Agreement and that you understand that for a period of seven (7) days following the execution of this Agreement you may revoke the same, and that the Agreement shall not become effective and enforceable until this revocation period has expired. -7- Cullen/Frost Bankers If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our binding agreement on this subject. Sincerely, CULLEN/FROST BANKERS, LTD. By:/s/T.C. Frost -------------------------------------- T.C. Frost, Senior Chairman of the Board of Directors Agreed to this 28th day ---- of June 1996. ----------- /s/ Robert S. McClane - ----------------------- Robert S. McClane -8- EX-11 3 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 Statement re: Computation of Earnings Per Share
CULLEN/FROST BANKERS, INC. Computation or Earnings Per Common Share Primary and Fully Diluted (Unaudited) (in thousands, except per share amounts) December 31 -------------------------- Primary Earnings Per Share 1996 1995 1994 - -------------------------- ------- ------- ------- Income before cumulative effect of accounting change $54,978 $46,279 $37,423 ======= ======= ======= Weighted average shares outstanding 22,444 22,308 22,118 Addition from assumed exercise of stock options 462 368 328 ------- ------- ------- Weighted average number of common shares outstanding 22,906 22,676 22,446 ======= ======= ======= Primary earnings per common share: Net income $ 2.40 $ 2.04 $ 1.67
December 31 -------------------------- Fully Diluted Earnings Per Share 1996 1995 1994 - -------------------------------- ------- ------- ------- Income before cumulative effect of accounting change $54,978 $46,279 $37,423 ======= ======= ======= Weighted average shares outstanding 22,444 22,308 22,118 Addition from assumed exercise of stock options 573 472 328 ------- ------- ------- Weighted average number of common shares outstanding 23,017 22,780 22,446 ======= ======= ======= Fully diluted earnings per common share: Net income $ 2.39 $ 2.03 $ 1.67
EX-13 4 CULLEN/FROST 1996 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 The Cullen/Frost 1996 Annual Report to Shareholders for the Year Ended December 31, 1996 (furnished for the information of the Commission and not deemed to be "filed" except for the portions expressly incorporated by reference) FINANCIAL REVIEW Cullen/Frost Bankers, Inc. and Subsidiaries The accompanying audited consolidated financial statements of Cullen/Frost Bankers, Inc. and Subsidiaries ("Cullen/Frost" or the "Corporation") present the Corporation's results of operations for the years 1994 through 1996. All balance sheet amounts presented in the following financial review are averages unless otherwise indicated. Certain reclassifications have been made to make prior periods comparable. Taxable-equivalent adjustments assume a 35 percent federal tax rate. Dollar amounts in tables are stated in thousands, except for per share amounts. The number of shares outstanding and related earnings per share amounts have been restated to retroactively give effect for the two-for- one stock split declared and distributed by the Corporation during the second quarter of 1996. Results Of Operations For the year ended December 31, 1996, the Corporation reported net income of $55.0 million or $2.40 per common share, an all-time high in the 128-year history of Cullen/Frost. Net income after taxes for 1995 was $46.3 million or $2.04 per common share, compared with $37.4 million or $1.67 per common share for 1994. The Corporation's return on average assets for 1996 was 1.22 percent compared with 1.17 percent in 1995 and 1.02 percent in 1994, while return on average equity was 15.32 percent in 1996 compared with 14.32 percent in 1995 and 13.04 percent in 1994. As noted in more detail below, the Corporation has historically used the purchase method in accounting for its acquisitions which has resulted in the creation of intangible assets. These intangible assets are deducted from capital in the determination of regulatory capital. Thus, "cash" or "tangible" earnings represents the regulatory capital generated during the year and can be viewed as net income excluding intangible amortization, net of tax. While the definition of "cash" or "tangible" earnings may vary by company, we believe this definition is appropriate as it measures the per share growth of regulatory capital, which impacts the amount available for dividends, stock repurchases and acquisitions. The following table reconciles reported earnings to net income excluding intangible amortization ("cash" earnings):
Year Ended December 31 --------------------------------------------------------------- 1996 1995 - ----------------------------------------------------------------------------------------- Reported Intangible "Cash" Reported Intangible "Cash" earnings Amortization earnings earnings Amortization earnings - ----------------------------------------------------------------------------------------- Income before income taxes $85,737 $11,306 $97,043 $71,277 $8,124 $79,401 Income taxes 30,759 3,267 34,026 24,998 2,495 27,493 ----------------------------------------------------------------- Net income $54,978 $ 8,039 $63,017 $46,279 $5,629 $51,908 ================================================================= Net income per common share $ 2.40 $ .35 $ 2.75 $ 2.04 $ .25 $ 2.29 Return on assets 1.22% 1.40%* 1.17% 1.32%* Return on equity 15.32 17.56 ** 14.32 16.06** * Calculated as A/B ** Calculated as A/C 1996 1995 ----------------- ----------- ----------- (A) Net income before intangible amortization (including goodwill and core deposit intangibles, net of tax) $ 63,017 $ 51,908 (B) Total average assets 4,496,495 3,944,026 (C) Average shareholders' equity 358,837 323,288
Year Ended December 31 --------------------------------------- 1994 - --------------------------------------------------------------- Reported Intangible "Cash" earnings Amortization earnings - -------------------------------------------------------------- Income before income taxes $57,600 $7,627 $65,227 Income taxes 20,177 2,607 22,784 ------------------------------- Net income $37,423 $5,020 $42,443 =============================== Net income per common share $ 1.67 $ .22 $ 1.89 Return on assets 1.02% 1.16%* Return on equity 13.04 14.79 ** * Calculated as A/B ** Calculated as A/C 1994 - -------------------- ----------- (A) Net income before intangible amortization (including goodwill and core deposit intangibles, net of tax) $ 42,443 (B) Total average assets 3,658,187 (C) Average shareholders' equity 287,005
Acquisitions On March 7, 1997, the Corporation paid approximately $32.2 million to acquire Corpus Christi Bancshares, Inc., which owns the $184 million-deposit Citizens State Bank, based in Corpus Christi, Texas. This transaction will be accounted for as a purchase with total cash consideration being funded through internal sources. Total intangibles associated with the acquisition were approximately $21.4 million. This acquisition is expected to be slightly accretive to the Corporation's 1997 net income. On January 5, 1996, the Corporation paid approximately $17.7 million to acquire S.B.T. Bancshares, Inc., including its subsidiary, State Bank and Trust Company in San Marcos, Texas. The Corporation acquired deposits of approximately $112 million. Total intangibles associated with the acquisition were approximately $11.0 million. On February 15, 1996, the Corporation paid approximately $33.5 million to acquire Park National Bank in Houston, Texas. The Corporation acquired deposits of approximately $225 million. Total intangibles associated with the acquisition were $16.8 million. The acquisitions did not have a material impact on the Corporation's 1996 net income. On April 4, 1995, the Corporation entered the Rio Grande Valley area with the acquisition of Valley Bancshares, Inc., including its subsidiary, Valley National Bank in McAllen, Texas with approximately $49 million in deposits. Total intangibles associated with the acquisition were approximately $5.0 million. On May 19, 1995, the acquisition of National Commerce Bank in Houston with its three branch locations and approximately $101 million in deposits was completed. Total intangibles associated with the acquisition were approximately $15.6 million. On July 21, 1995, the Corporation acquired the two San Antonio branches of Comerica Bank Texas with approximately $34 million in deposits. The acquisitions did not have a material impact on the Corporation's 1996 and 1995 net income. During 1994, Cullen/Frost made two acquisitions. In April 1994, the Corporation acquired Texas Commerce Bank-Corpus Christi in exchange for Cullen/Frost Bank of Dallas, N.A. No gain or loss resulted from this transaction. The Corporation expanded its product line in December 1994 with the acquisition of Creekwood Capital Corporation, an asset-based lender, headquartered in Houston. Total intangibles associated with the acquisition were approximately $2.3 million.
1996 Change 1995 Change Earnings Summary 1996 From 1995 1995 From 1994 1994 - ---------------------------------------------------------------------------------------- Taxable-equivalent net interest income $180,079 $ 26,943 $153,136 $ 16,147 $136,989 Taxable-equivalent adjustment 997 116 881 239 642 --------------------------------------------- Net interest income 179,082 26,827 152,255 15,908 136,347 Provision for possible loan losses 7,300 1,028 6,272 6,272 Non-interest income: Net loss on securities transactions (980) 416 (1,396) 2,642 (4,038) Other 95,515 6,376 89,139 8,286 80,853 ---------------------------------------------- Total non-interest income 94,535 6,792 87,743 10,928 76,815 Non-interest expense: Intangible amortization 11,306 3,182 8,124 497 7,627 Other operating expenses 169,274 14,949 154,325 6,390 147,935 ---------------------------------------------- Total non-interest expense 180,580 18,131 162,449 6,887 155,562 ---------------------------------------------- Income before income taxes 85,737 14,460 71,277 13,677 57,600 Income taxes 30,759 5,761 24,998 4,821 20,177 ---------------------------------------------- Net income $ 54,978 $ 8,699 $ 46,279 $ 8,856 $ 37,423 ============================================== Cash earnings* $ 63,017 $ 11,109 $ 51,908 $ 9,465 $ 42,443 Per common share Net income-primary $ 2.40 $ .36 $ 2.04 $ .37 $ 1.67 Net income-fully diluted 2.39 .36 2.03 .36 1.67 Cash earnings-primary 2.75 .46 2.29 .40 1.89 Cash earnings-fully diluted 2.74 .46 2.28 .39 1.89 Return on Average Assets 1.22% .05% 1.17% .15% 1.02% Cash earnings ROA 1.40 .08 1.32 .16 1.16 Return on Average Equity 15.32 1.00 14.32 1.28 13.04 Cash earnings ROE 17.56 1.50 16.06 1.27 14.79 * Net income before intangible amortization (including goodwill and core deposit intangibles, net of tax)
Net Interest Income Net interest margin, which represents the average net effective yield on earning assets, calculated as net interest income on a taxable-equivalent basis expressed as a percentage of average total earning assets, was 4.76 percent for the year ended December 31, 1996, compared to 4.56 percent and 4.39 percent for the years 1995 and 1994, respectively. The increase in net interest income and net interest margin from a year ago is reflective of higher loan volumes and lower deposit costs. Net interest spread for 1996 increased 18 basis points to 3.98 percent. Net interest spread was 3.80 percent and 3.82 percent for 1995 and 1994, respectively. The increase in net interest spread from 1995 is primarily due to the Corporation's ability to maintain its earnings on funds with higher loan volumes and the favorable impact of the acquisitions, while deposit costs decreased. The net interest spread as well as the net interest margin could be impacted by future changes in short- and long-term interest rate levels.
Net Interest Income and Net Interest Margin Net Interest Spread ($ in millions - taxable equivalent) (taxable-equivalent) (Graphic material omitted) (Graphic material omitted) Year Net Interest Net Interest Year Earnings Cost of Net Interest Ended Income Margin Ended on Funds Funds Spread - ------ ------------ ----------- ----- ------ -------- ------------ 1992 $118 4.43% 1992 7.19% 3.39% 3.80% 1993 129 4.27 1993 6.33 2.57 3.76 1994 137 4.39 1994 6.61 2.79 3.82 1995 153 4.56 1995 7.65 3.85 3.80 1996 180 4.76 1996 7.71 3.73 3.98
Interest Rate Sensitivity The Corporation's interest rate sensitivity and liquidity are monitored by its Asset/Liability Management Committee on an ongoing basis. The Committee seeks to avoid fluctuating net interest margins and to maintain consistent growth of net interest income through periods of changing interest rates. As the accompanying table indicates, the Corporation is liability-sensitive, on a cumulative basis, at time periods of one year or less. The Corporation continuously monitors and manages the balance between interest rate-sensitive assets and liabilities. The Corporation's objective is to manage the impact of fluctuating market rates on net interest income within acceptable levels.
December 31, 1996 -------------------------------------------------------------------- Immediately Non-Rate Cumulative Interest Rate Sensitive Rate Sensitive Within Sensitive Rate Sensitivity -------------- ------------------------------ ----------- (Period-End Balances) 0-30 Days 90 Days One Year Five Years >5 Years Total - ------------------------------------------------------------------------------------------ Earning Assets: Loans $1,267,775 $1,399,901 $1,635,098 $2,005,009 $247,141 $2,252,150 Securities 230,347 299,531 856,517 1,318,632 157,792 1,476,424 Federal funds sold and other short-term investments 52,850 52,850 52,850 52,850 52,850 ------------------------------------------------------------------ Total earning assets $1,550,972 $1,752,282 $2,544,465 $3,376,491 $404,933 $3,781,424 ================================================================== Interest-Bearing Liabilities: Savings and Interest- on-Checking $ 726,700 $ 726,700 $ 726,700 $ 726,700 $ 726,700 Money market deposit accounts 876,382 876,382 876,382 876,382 876,382 Certificates of deposit and other time accounts 349,935 684,129 1,169,674 1,220,555 $ 87,742 1,308,297 Federal funds purchased and other borrowings 174,107 174,107 174,107 174,107 174,107 ------------------------------------------------------------------ Total interest-bearing liabilities $2,127,124 $2,461,318 $2,946,863 $2,997,744 $ 87,742 $3,085,486 ================================================================== Interest sensitivity gap$ (576,152) $ (709,036) $ (402,398) $ 378,747 $317,191 $ 695,938 ================================================================== Ratio of earning assets to interest-bearing liabilities .73 .71 .86 1.13 =============================================
In developing the classifications used for this analysis, it was necessary to make certain assumptions and approximations in assigning assets and liabilities to different maturity categories. For example, savings and Interest-on- Checking are subject to immediate withdrawal and as such are presented as repricing within the earliest period presented even though their balances have historically not shown significant sensitivity to changes in interest rates. Loans are included net of unearned discount of $1,154,000. Consumer loans are distributed in the immediately rate-sensitive category for those tied to market rates or to other categories according to the repayment schedule. The above table does not reflect interest rate swaps further discussed on page 26. Liquidity Asset liquidity is provided by cash and assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash, short-term investments in time deposits in banks, Federal funds sold and securities purchased under resale agreements and securities available for sale. Liquidity is also provided by access to funding sources which include core depositors and correspondent banks in the Corporation's natural trade area which maintain accounts with and sell Federal funds to subsidiary banks of the Corporation, as well as brokered deposits and Federal funds purchased and securities sold under repurchase agreements from upstream banks. Non-Interest Income Non-interest income of $94,535,000 was reported for 1996, compared with $87,743,000 for 1995 and $76,815,000 for 1994. Excluding securities transactions, total non-interest income increased 7.2 percent from 1995.
Year Ended December 31 ------------------------------------------------------ 1996 1995 1994 ---------------- ------------------ ---------------- Percent Percent Percent Non-Interest Income Amount Change Amount Change Amount Change - ------------------------------------------------------------------------------ Trust department $34,031 + 7.1% $31,762 + 7.6% $29,529 + 12.4% Service charges on deposit accounts 38,294 + 26.0 30,382 + 7.8 28,182 + 3.2 Other service charges, collection and exchange charges, commissions and fees 8,764 - 20.7 11,055 + 18.0 9,366 + 17.5 Net loss on securities transactions (980) - 29.8 (1,396) - 65.4 (4,038) -381.8 Other 14,426 - 9.5 15,940 + 15.7 13,776 + 4.0 ------- ------- ------- Total $94,535 + 7.7 $87,743 + 14.2 $76,815 + .8 ======= ======= =======
Trust income was up $2.3 million or 7.1 percent during 1996 due to higher investment, employee benefit trust, and personal trust fees. This increase was offset by lower corporate trust income resulting from the sale of the Corporation's corporate trust business in 1995. At December 31, 1996, the market value of trust assets totaled $8.1 billion compared to $6.9 billion, at December 31, 1995, with the increase in the number of accounts held and the rise in the stock market being the primary reasons for the increase. The December 1996 trust assets were comprised of discretionary assets of $4.2 billion and non-discretionary assets of $3.9 billion. The $2.2 million or 7.6 percent increase in trust income from 1994 to 1995 is attributable primarily to improved financial market conditions and increased fee structures that were implemented in the second quarter of 1994. Deposit service charges are up $7.9 million or 26.0 percent from 1995. The increase is due mainly to higher volumes, primarily processing for correspondent banks, and service charges on corporate and retail deposits. Acquisitions account for approximately one-third of the increase. Other service charges and fees decreased $2.3 million or 20.7 percent when compared to 1995. This is primarily due to lower income from bankcard discounts as a result of the Corporation's outsourcing of its bankcard processing operations which was completed in May 1996. The 18.0 percent increase in other service charges from 1994 to 1995 is primarily due to fees associated with higher business volumes, bankcard discount, fees from the sale of mutual funds and higher loan prepayment fees. During the second quarter of 1996, the Corporation restructured a portion of its available for sale investment portfolio resulting in losses of $903,000. This portfolio restructuring of replacing lower-yielding securities with higher-yielding securities should have a favorable impact on net interest income in the future. See "Securities," page 26. During the fourth quarter of 1995 and 1994, the Corporation restructured a portion of its available for sale portfolio resulting in losses of approximately $1.5 million and $3.5 million, respectively. Other non-interest income decreased $1.5 million or 9.5 percent to $14,426,000 in 1996 compared to a $2.2 million or 15.7 percent increase in 1995. The decrease in 1996 and the increase in 1995 are primarily due to the gain recognized on the sale of the Corporation's corporate trust business in 1995.
Non-Interest Income ($ in thousands) (Graphic material omitted) Net Gain(Loss) Year Service Other Service on Securities Ended Trust Charges Charges Other Transactions - ----- ---------- ------- ------------- ------- -------------- 1992 $21,861 $23,663 $ 6,183 $10,338 $ (232) 1993 26,278 27,303 7,972 13,243 1,433 1994 29,529 28,182 9,366 13,776 (4,038) 1995 31,762 30,382 11,055 15,940 (1,396) 1996 34,031 38,294 8,764 14,426 (980)
Non-Interest Expense Non-interest expense was $180,580,000 for 1996 compared with $162,449,000 for 1995 and $155,562,000 for 1994. The primary reason for the increase in non-interest expenses from a year ago was due to the acquisitions.
Year Ended December 31 ----------------------------------------------------- 1996 1995 1994 ---------------- ------------------ --------------- Percent Percent Percent Non-Interest Expense Amount Change Amount Change Amount Change - ----------------------------------------------------------------------------- Salaries and wages $ 71,788 +23.4% $ 58,177 + 9.8% $ 52,986 - 1.2% Pension and other employee benefits 15,351 +40.8 10,905 +10.0 9,910 -17.8 Net occupancy of banking premises 18,782 + 4.4 17,992 +14.0 15,777 -24.0 Furniture and equipment 11,789 + 4.7 11,259 + 2.9 10,937 + 7.7 Intangible amortization 11,306 +39.2 8,124 + 6.5 7,627 +10.9 Other 51,564 - 7.9 55,992 - 4.0 58,325 -13.1 -------- -------- -------- Total $180,580 +11.2 $162,449 + 4.4 $155,562 - 9.6 ======== ======== ========
Salaries and wages increased by $13.6 million or 23.4 percent during 1996 primarily because of acquisitions. Pension and other employee benefits increased by $4.4 million or 40.8 percent during 1996 primarily due to higher retirement plan expense, payroll tax, and medical insurance expense related to the acquisitions and the impact of an early retirement charge. The 10.0 percent increase in pension and other employee benefits from 1994 to 1995 reflects an adjustment which lowered medical insurance expense in 1994, higher retirement plan expense and the impact of acquisitions. The 1994 adjustment to medical insurance resulted from the implementation of a managed health care network and favorable claims experience. Net occupancy of banking premises increased $790,000 or 4.4 percent during 1996 primarily due to higher lease, building maintenance, and property tax expense related to the acquisitions. The 14.0 percent increase during 1995 is primarily because of higher property taxes, increased lease expense as a result of acquisitions, and building maintenance expenses. Furniture and equipment costs increased $530,000 or 4.7 percent in 1996 mostly due to higher depreciation expense associated with the acquisitions. Intangible amortization increased by $3.2 million or 39.2 percent from the same period one year ago due to the acquisitions. Other non-interest expense decreased $4.4 million or 7.9 percent during 1996 primarily due to decreases in FDIC insurance, franchise taxes, and federal reserve service charges. Other non-interest expense was down 4.0 percent in 1995 mostly due to lower FDIC insurance premiums and the timing of charitable contributions. The Corporation paid a minimal FDIC insurance premium in 1996 compared to $3.6 million in 1995 and $6.9 million in 1994. For the second half of 1995, the FDIC assessment rate imposed on banks ranged from 4 cents for each $100 of domestic deposits (for well capitalized banks in the highest of three supervisory rating categories) to 31 cents (for inadequately capitalized banks in the lowest of the three supervisory rating categories). This was a decrease from the previous assessment range of 23 cents to 31 cents for those respective categories, for each $100 of domestic deposits. For 1996, the FDIC Board reduced the insurance premiums to zero for banks in the lowest risk category. However, legislative action enacted in 1996 provides for assessments on banks (based on deposit levels) to pay interest on Financing Corporation (FICO) bonds, the proceeds of which were used in the bailout of the Savings and Loan industry in the 1980's. For each of the three years beginning in 1997, the assessment on banks is expected to be approximately 1.3 cents for each $100 of qualified deposits. Based on year-end deposit levels, the 1997 expense would be approximately $500,000. During 1996, the Corporation did not take a provision for real estate losses compared to a $610,000 provision for real estate losses in 1995 and no provision in 1994. The Corporation's efficiency ratio of 65.5 percent for 1996 improved from 66.8 percent for 1995 and 71.4 percent for 1994. The efficiency ratio measures what percentage of bank revenue is absorbed by non-interest expense.
Non-Interest Expense ($ in thousands) (Graphic material omitted) Net Occupancy Provision Year Salaries, Wages & Furniture and Intangible for Real Estate Ended and Benefits Equipment Amortization Other Losses - ----- --------------- --------------- ------------ ------- --------------- 1992 $55,930 $25,258 $ 700 $52,299 $12,963 1993 65,706 30,904 6,877 67,146 1,445 1994 62,896 26,714 7,627 58,325 0 1995 69,082 29,251 8,124 55,382 610 1996 87,139 30,571 11,306 51,564 0
Income Taxes The Corporation recognized income tax expense of $30,759,000 in 1996, compared to $24,998,000 in 1995, and $20,177,000 in 1994. The effective tax rate increased to 35.88 percent in 1996 from 35.07 percent in 1995 and 35.03 percent in 1994. For a detailed analysis of the Corporation's income taxes see Note O "Income Taxes" on page 47. Sources and Uses Of Funds Average assets for 1996 of $4,496,495,000 increased by 14.0 percent from 1995 levels and increased 7.8 percent between 1994 and 1995. Funding sources in 1996 reflected an increase in deposits while Federal funds purchased were reduced. The Corporation's uses of funds continued a trend which started in 1995 of replacing securities with loans as the largest component of earning assets. This reflects the increases in loan volumes from a year ago.
Percentage of Total Average Assets ---------------------------------- Sources and Uses of Funds 1996 1995 1994 - ----------------------------------------------------------------------------- Sources of Funds: Deposits: Demand 23.9% 21.9% 22.9% Time 62.8 61.6 62.4 Federal funds purchased 3.3 6.4 5.2 Equity capital 8.0 8.2 7.9 Borrowed funds .4 .3 Other liabilities 1.6 1.6 1.6 ----------------------------- Total 100.0% 100.0% 100.0% ============================= Uses of Funds: Loans 46.4% 42.7% 36.6% Securities 34.6 39.5 45.7 Federal funds sold 3.1 3.0 3.0 Non-earning assets 15.9 14.8 14.7 ----------------------------- Total 100.0% 100.0% 100.0% =============================
Loans Average loans for 1996 were $2,086,816,000, an increase of 24.0 percent from 1995. This was driven by continued improved economic conditions in the Texas markets the Corporation serves and the result of the acquisitions.
Total Average Loans and Yields ($ in millions) (Graphic material omitted) Average Loan Year Average Loans Yield - ---- ------------- ------------ 1992 $1,046 8.11% 1993 1,172 7.79 1994 1,340 7.97 1995 1,683 8.99 1996 2,087 8.84
December 31 --------------------------------------------------------------- 1996 ----------------------- Loan Portfolio Analysis Percentage of (Period-End Balances) Amount Total Loans 1995 1994 1993 1992 - ----------------------------------------------------------------------------------- Real Estate: Construction $ 84,091 3.7% $ 54,168 $ 44,502 $ 32,297 $ 26,632 Land 50,208 2.2 37,695 36,805 32,317 39,991 Permanent Mortgages: Commercial 225,845 10.0 198,276 177,223 144,122 77,347 Residential 422,787 18.8 339,576 277,725 276,165 253,471 Other 260,603 11.6 208,190 178,263 150,499 134,470 --------------------------------------------------------------- Total real estate 1,043,534 46.3 837,905 714,518 635,400 531,911 Commercial and industrial 649,721 28.9 508,990 375,085 311,436 256,520 Consumer 491,072 21.8 402,169 331,039 268,331 217,232 Financial institutions 12,749 .6 10,409 5,578 284 9,380 Foreign 45,562 2.0 43,847 45,290 31,763 17,871 Purchasing or carrying securities 1,812 .1 1,711 1,884 1,204 1,918 Other 8,854 .4 13,068 13,386 17,797 7,737 Unearned discount (1,154) (.1) (1,337) (3,487) (8,456) (12,632) ---------------------------------------------------------------- Total $2,252,150 100.0% $1,816,762 $1,483,293 $1,257,759 $1,029,937 ================================================================ Percent change from previous year +24.0% +22.5% +17.9% +22.1% -7.1%
Period-end loans increased to $2,252,150,000 at year-end 1996, up 24.0 percent from the previous year end. Most of the increase in period-end loans is attributable to real estate and commercial loans which increased $206 million and $141 million, respectively. Approximately one-half of the increase in total loans from a year ago resulted from acquisitions. Total real estate loans at December 31, 1996 were $1,043,534,000 up 24.5 percent from year-end 1995. Amortizing permanent mortgages represented 62.2 percent of the total real estate loan portfolio at year end. Residential mortgages increased $83,211,000 or 24.5 percent. Real estate loans categorized as "other" are primarily amortizing commercial and industrial loans with maturities of less than five years. Approximately 62 percent of all commercial real estate loans are owner occupied or have a major tenant (National or Regional company) with a manageable risk level. Mexican Loans At December 31, 1996, the Corporation's cross-border outstandings to Mexico, excluding $15,630,000 in loans secured by liquid U.S. assets, totaled $29,932,000, down from $30,586,000 last year. Most of the Corporation's Mexican loans are either secured by liquid U.S. assets or are unsecured loans to major financial institutions to finance international trade transactions. Of the trade-related credits, approximately 85 percent are related to companies exporting from Mexico. At December 31, 1996, none of the Mexican-related loans were on non-performing status.
December 31 ------------------------------------------ 1996 ------------------------------------------ Percentage of Percentage of Mexican Loans Amount Total Loans Total Assets - ---------------------------------------------------------------------- Financial institutions $24,932 1.1% .5% Commercial and industrial 5,000 .2 .1 ------------------------------------ Total $29,932 1.3% .6% ==================================== The above table excludes $15,630,000, $13,261,000 and $21,267,000 in loans secured by liquid assets held in the United States in 1996, 1995 and 1994, respectively.
December 31 ------------------------------------------ 1995 ------------------------------------------ Percentage of Percentage of Mexican Loans Amount Total Loans Total Assets - ---------------------------------------------------------------------- Financial institutions $30,560 1.7% .7% Commercial and industrial 26 ------------------------------------ Total $30,586 1.7% .7% ==================================== The above table excludes $15,630,000, $13,261,000 and $21,267,000 in loans secured by liquid assets held in the United States in 1996, 1995 and 1994, respectively.
December 31 ------------------------------------------ 1994 ------------------------------------------ Percentage of Percentage of Mexican Loans Amount Total Loans Total Assets - ---------------------------------------------------------------------- Financial institutions $23,999 1.6% .6% Commercial and industrial 24 ------------------------------------ Total $24,023 1.6% .6% ==================================== The above table excludes $15,630,000, $13,261,000 and $21,267,000 in loans secured by liquid assets held in the United States in 1996, 1995 and 1994, respectively.
Non-Performing Assets Non-performing assets decreased 25.9 percent to $11,966,000 at December 31, 1996, compared with $16,155,000 at December 31, 1995 and $19,938,000 at December 31, 1994. Non-performing assets as a percentage of total loans and foreclosed assets decreased to .53 percent at December 31, 1996, down from .89 percent one year ago. Non-performing asset levels continued their steady decline from their high in 1989, which resulted from the dramatic economic downturn in Texas during the 1980's. The recovery of the Texas economy since that period created a demand for real estate and improved financial conditions in general enabling the Corporation to significantly reduce the levels of non- performing assets. Since 1990, non-performing assets have been reduced by charge-offs, sales of Other Real Estate Owned, and the resolution of problem loans.
December 31 --------------------------------------------------- Non-Performing Assets 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------- Non-accrual and restructured loans $ 9,724 $14,646 $16,627 $27,677 $41,851 Foreclosed assets 2,242 1,509 3,311 3,433 9,452 -------------------------------------------------- Total $11,966 $16,155 $19,938 $31,110 $51,303 ================================================== As a percentage of total assets .24% .38% .53% .85% 1.63% As a percentage of total loans plus foreclosed assets .53 .89 1.34 2.47 4.94 After-tax impact of lost interest per common share $ .04 $ .05 $ .07 $ .10 $ .20 Accruing loans 90 days past due: Consumer $ 1,829 $ 1,276 $ 574 $ 765 $ 414 All other 4,082 3,912 3,070 3,827 1,431 -------------------------------------------------- Total $ 5,911 $ 5,188 $ 3,644 $ 4,592 $ 1,845 ================================================== Interest income that would have been recorded in 1996 on non-performing assets, had such assets performed in accordance with their original contract terms, was $1,182,000 on non- accrual and restructured loans and $138,000 on foreclosed assets. During 1996, the amount of interest income actually recorded on non-accrual and restructured loans was $292,000. There were no foreign loans 90 days past due.
Non-Performing Assets ($ in millions) (Graphic material omitted) Non-Accrual and Foreclosed Year Restructured Loans Assets - ---- ------------------ ---------- 1992 $42 $9 1993 28 3 1994 17 3 1995 15 1 1996 10 2
Loans to a customer whose financial condition has deteriorated are considered for non-accrual status whether or not the loan is 90 days or more past due. All non-consumer loans 90 days or more past due are classified as non-accrual unless the loan is well secured and in the process of collection. When a loan is placed on non-accrual status, interest income is not recognized until collected, and any previously accrued but uncollected interest is reversed. Restructured loans have been modified as to original terms, resulting in a reduction or deferral of principal and/or interest as a concession to the debtor. Classification of an asset in the non-performing category does not preclude ultimate collection of loan principal or interest. At December 31, 1996, the Corporation had $6,825,000 in loans to borrowers experiencing financial difficulties which had not been included in either of the non-accrual, restructured or 90 days past due loan categories. Management monitors such loans closely and reviews their performance on a regular basis. Allowance For Possible Loan Losses The allowance for possible loan losses was $36,308,000 or 1.61 percent of period-end loans at December 31, 1996, compared to $31,577,000 or 1.74 percent of period-end loans at year-end 1995. The allowance for possible loan losses as a percentage of non-accrual and restructured loans was 373.4 percent at December 31, 1996, up from 215.6 percent at December 31, 1995. The Corporation recorded a $7,300,000 provision for possible loan losses during 1996, compared to $6,272,000 recorded during 1995. No provision was recorded during 1994. The provision is reflective of the continued growth in the loan portfolio. Despite the growth in loans in 1994, no provision for possible loan losses was recorded due to continued improvements in economic activity in the cities served by the Corporation, improved credit quality and real estate values and net recoveries of $2.1 million. The Corporation recorded net charge-offs of $2,569,000 for the year ended December 31, 1996, compared to net charge-offs of $436,000 and net recoveries of $2,127,000 for the years ended December 31, 1995 and 1994, respectively. The Corporation's charge-offs in 1996 consisted primarily of commercial and industrial loans which increased $5.5 million from $654,000 in 1995 and consumer loans which decreased slightly from a year ago. The Corporation's charge-offs in 1995 consisted primarily of consumer loan charge-offs, which increased to $3.8 million in 1995 from $2.4 million in 1994 primarily as a result of the increased loan volumes.
Year Ended December 31 Allowance for ------------------------------------------------------ Possible Loan Losses 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------- Average loans outstanding during year, net of unearned discount $2,086,816 $1,682,541 $1,339,656 $1,171,825 $1,045,883 ====================================================== Balance of allowance for possible loan losses at beginning of year $ 31,577 $ 25,741 $ 26,298 $ 31,897 $ 42,387 Provision (credit) for possible loan losses 7,300 6,272 (6,085) 5,498 Changes related to disposition of bank subsidiary (2,684) Charge-offs: Real estate (351) (228) (1,349) (3,481) (11,073) Commercial and industrial (6,176) (654) (316) (1,287) (5,641) Consumer (3,709) (3,797) (2,357) (3,369) (3,293) Other, including foreign (9) (2) (63) (3,828) ----------------------------------------------------- Total charge-offs (10,245) (4,681) (4,022) (8,200) (23,835) ----------------------------------------------------- Recoveries: Real estate 2,467 1,258 1,970 2,412 2,034 Commercial and industrial 3,665 1,722 2,434 3,577 3,783 Consumer 1,416 1,211 1,692 2,237 1,852 Other, including foreign 128 54 53 460 178 ------------------------------------------------------ Total recoveries 7,676 4,245 6,149 8,686 7,847 ------------------------------------------------------ Net (charge-offs) recoveries (2,569) (436) 2,127 486 (15,988) ------------------------------------------------------ Balance of allowance for possible loan losses at end of year $ 36,308 $ 31,577 $ 25,741 $ 26,298 $ 31,897 ====================================================== Net (charge-offs) recoveries as a percentage of average loans outstanding during year, net of unearned discount (.12)% (.03)% .16% .04% (1.53)% Allowance for possible loan losses as a percentage of year-end loans, net of unearned discount 1.61 1.74 1.74 2.09 3.10 There were no foreign charge-offs in 1996-1993. During 1992, the Corporation sold its $9,694,000 par bonds which had been received in 1990 under the Brady Mexican debt exchange. The par bonds were sold for $6,017,000 and resulted in a foreign charge-off of $3,677,000. The 1994 allowance for possible loan losses includes a reduction of $2,684,000 related to the exchange of Cullen/Frost Bank in Dallas for Texas Commerce Bank-Corpus Christi.
Allowance for Possible Loan Losses and Allowance to Year-End Loans ($ in thousands) (Graphic material omitted) Year Allowance for possible Allowance to Allowance to Non- Ended loan losses year-end loans performing loans - ----- ---------------------- --------------- ----------------- 1992 $31,897 3.10% 76.2% 1993 26,298 2.09 95.0 1994 25,741 1.74 154.8 1995 31,577 1.74 215.6 1996 36,308 1.61 373.4
On January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"), as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosure" ("SFAS No. 118"). These standards specify how allowances for certain impaired loans should be determined and the accounting for in-substance foreclosures. Adoption of these standards did not have a material impact on the Corporation's results of operations. The Corporation has certain lending policies and procedures in place which are designed to maximize loan income within an acceptable level of risk. These policies and procedures, some of which are described below, are reviewed regularly by senior management. A reporting system supplements this review process by providing management and the board of directors with frequent reports related to loan production, loan quality, loan delinquencies and non- performing and potential problem loans. Commercial and industrial loans are a diverse group of loans to small, medium and large businesses. The purpose of these loans vary from supporting seasonal working capital needs to term financing of equipment. These loans are underwritten after obtaining an understanding and analyzing the management and the financial condition of the business, including its ability to generate sufficient cash flow to repay the debt according to scheduled terms. While some short-term loans may be made on an unsecured basis, most are secured by the assets being financed with appropriate collateral margins. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. At December 31, 1996, the Corporation had no concentration of commercial and industrial loans in any single industry that exceeded 10 percent of total loans. The diversity of the commercial real estate portfolio allows the Corporation to reduce the impact of a decline in a single market or industry. In addition to monitoring and evaluating commercial real estate loans based on collateral, geography and risk grade criteria, management closely tracks its level of owner-occupied commercial real estate loans versus non-owner occupied loans. Additionally, the bank utilizes the knowledge of third party experts to provide insight and guidance about the economic conditions and dynamics of the markets served by the Corporation. Within the commercial real estate loan category, the Corporation's primary focus has been the growth of loans secured by owner-occupied properties. At December 31, 1996, a majority of the Corporation's commercial real estate loans were secured by owner-occupied properties. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Consequently, these loans must withstand the analysis of a commercial loan and the underwriting process of a commercial real estate loan. Loans secured by non-owner occupied commercial real estate are made to developers and builders who have a relationship with the Corporation and who have a proven record of success. These loans are underwritten through the use of feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Sources of repayment for these types of loans may be pre- committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Corporation. These loans are closely monitored by on-site inspections and are considered more risky than the other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. The consumer loan portfolio has three distinct segments -- indirect consumer loans, which represent 56 percent of the consumer loan portfolio, direct non-real estate consumer loans, which represent 28 percent of the portfolio and direct real estate consumer loans, which represent 16 percent. The indirect segment is composed almost exclusively of new and used automobile financing. Non-real estate direct loans include automobile loans, unsecured revolving credit products, personal loans secured by cash and cash equivalents, and other similar types of credit facilities. The direct real estate loans are primarily extended for home improvement purposes. A computer based credit scoring analysis is used to supplement the consumer loan underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes the risk of any major charge-offs. Additionally, trend and outlook reports are provided to senior management on a frequent basis to aid in planning. The Corporation has an independent Loan Review Division that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to senior management and the board of directors. Loan Review's function complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel as well as the Corporation's policies and procedures. Loans identified as losses by management, internal loan review and/or bank examiners are charged-off. Furthermore, installment and credit card loans are charged-off automatically based on past-due status. An allowance for possible loan losses is maintained in an amount which, in management's judgment, provides an adequate reserve to absorb possible loan losses. Industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, the impact of rising interest rates, experience level and effectiveness of employees, economic, competitive, political and regulatory conditions and other pertinent factors are all considered in determining the adequacy of the allowance. An audit committee of non-management directors reviews the adequacy of the allowance for possible loan losses quarterly.
December 31 ----------------------- 1996 ----------------------- Allowance As a for Percentage Possible of Allocation of Allowance Loan Total for Possible Loan Losses Losses Loans - -------------------------------------------------------- Commercial and industrial $ 6,504 .29% Real estate 6,707 .30 Consumer 13,805 .61 Purchasing or carrying securities 6 Financial institutions 44 Other, including foreign 159 .01 Not allocated 9,083 .40 ------------------- Total $36,308 1.61% =================== December 31 ----------------------------------------------- 1995 1994 ----------------------- ----------------------- Allowance As a Allowance As a for Percentage for Percentage Possible of Possible of Allocation of Allowance Loan Total Loan Total for Possible Loan Losses Losses Loans Losses Loans - ------------------------------------------------------------------------------- Commercial and industrial $ 7,991 .44% $ 4,291 .29% Real estate 9,076 .50 8,584 .58 Consumer 12,110 .67 10,384 .70 Purchasing or carrying securities 6 7 Financial institutions 32 28 Other, including foreign 167 .01 160 .01 Not allocated 2,195 .12 2,287 .16 -------------------------------------------- Total $31,577 1.74% $25,741 1.74% ============================================ December 31 ----------------------------------------------- 1993 1992 ----------------------- ----------------------- Allowance As a Allowance As a for Percentage for Percentage Possible of Possible of Allocation of Allowance Loan Total Loan Total for Possible Loan Losses Losses Loans Losses Loans - -------------------------------------------------------------------------------- Commercial and industrial $ 3,453 .27% $ 3,752 .36% Real estate 10,432 .83 14,069 1.37 Consumer 6,756 .54 5,238 .51 Purchasing or carrying securities 3 59 .01 Financial institutions 8 123 .01 Other, including foreign 332 .03 498 .05 Not allocated 5,314 .42 8,158 .79 -------------------------------------------- Total $26,298 2.09% $31,897 3.10% ============================================
Allocation of a portion of the allowance does not preclude its availability to absorb losses in other categories. The unallocated portion of the allowance represents an additional amount beyond that specifically reserved for specific risks available to absorb unidentified losses in the current loan portfolio. Securities Total securities, including securities available for sale, were $1,476,424,000 at year-end 1996 compared to $1,536,567,000 a year ago. In the second quarter of 1996, the Corporation restructured a portion of its available for sale investment portfolio resulting in losses of $903,000. During the fourth quarter of 1995, the Financial Accounting Standards Board granted a one- time reassessment of the classification of all securities. The Corporation took advantage of this opportunity and reclassified $733,206,000 in securities from held to maturity to available for sale. Subsequently, in December 1995, the Corporation sold $79,075,000 in securities from its available for sale portfolio resulting in securities losses of approximately $1.5 million. This portfolio restructuring of replacing lower-yielding securities with higher- yielding securities should have a favorable impact on net interest income in the future. Securities available for sale totaled $1,299,285,000 at December 31, 1996, compared to $1,325,836,000 at year-end 1995. These securities consist primarily of U.S. Treasury securities and obligations of U.S. Government agencies. The remaining securities, consisting primarily of U.S. Government agency obligations, are classified as securities held to maturity and are carried at amortized cost. Debt securities are classified as held to maturity when the Corporation has the positive intent and ability to hold the securities to maturity. Available for sale securities are stated at fair value, with unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. The average yield of the securities portfolio for the year ended December 31, 1996 was 6.42 percent compared with 6.36 percent for 1995.
December 31 ----------------------------------------------------------------- 1996 1995 1994 --------------------- --------------------- --------------------- Period-end Percentage Period-end Percentage Period-end Percentage Securities Balance of Total Balance of Total Balance of Total - --------------------------------------------------------------------------------------- U.S. Treasury $ 231,351 15.7% $ 223,457 14.5% $ 241,625 15.2% U.S. Government agencies and corporations 1,233,238 83.5 1,301,731 84.7 1,325,070 83.1 States and political subdivisions 5,449 .4 5,527 .4 5,683 .3 Other 6,386 .4 5,852 .4 21,664 1.4 --------------------------------------------------------------- Total $1,476,424 100.0% $1,536,567 100.0% $1,594,042 100.0% =============================================================== Average yield earned during the year (taxable- equivalent basis) 6.42% 6.36% 5.70%
Interest Rate Swaps During 1996, the Corporation continued its strategy of entering into off- balance sheet interest rate swaps to hedge its interest rate risk by essentially converting fixed-rate loans into synthetic variable-rate instruments. These swap transactions allow management to structure the interest rate sensitivity of the asset side of the Corporation's balance sheet to more closely match it's view of the interest rate sensitivity of the Corporation's funding sources. The Corporation had 31 interest rate swaps at December 31, 1996 compared to 12 interest rate swaps at December 31, 1995. Each swap was a hedge against a specific commercial fixed-rate loan or against a specific pool of consumer fixed-rate loans, with a notional amount of $251 million and $143 million, respectively. In each case, the amortization of the interest rate swap generally matches the expected amortization of the underlying loan or pool of loans and was a hedge against either a specific commercial loan or a specific pool of consumer loans with lives ranging from two to ten years. Each counterpart to a swap transaction has a credit rating that is investment grade. The net amount payable or receivable under these interest rate swap contracts is accrued as an adjustment to interest income and is not considered material in 1996 and 1995. Deposits
Total Average Deposits (Graphic material omitted) Average Average Average Year Demand Time Total Cost of Time Ended Deposits Deposits Deposits Deposits - ----- -------- ---------- ---------- ------------ 1992 $ 665,528 $2,045,169 $2,710,697 3.36% 1993 816,446 2,267,304 3,083,750 2.56 1994 836,711 2,284,148 3,120,859 2.71 1995 864,566 2,428,349 3,292,915 3.70 1996 1,076,029 2,825,271 3,901,300 3.66
Total average demand deposits increased 24.5 percent from 1995. This can be attributed to an increase in commercial and individual and correspondent bank deposit levels of $135.9 million and $67.5 million, respectively. The increase in commercial and individual is partially related to the acquisitions.
1996 1995 1994 ------------------ ------------------ ------------------- Average Percent Average Percent Average Percent Demand Deposits Balance Change Balance Change Balance Change - ----------------------------------------------------------------------------- Commercial and individual $ 832,356 +19.5% $696,499 + 3.4% $673,764 + 6.7% Correspondent banks 198,750 +51.4 131,295 + 5.5 124,416 -13.0 Public funds 44,923 +22.2 36,772 - 4.6 38,531 - 8.4 ---------- -------- -------- Total $1,076,029 +24.5 $864,566 + 3.3 $836,711 + 2.5 ========== ======== ========
Total average time deposits increased 16.3 percent from 1995, partially due to the acquisitions, with the largest dollar increase coming from money market deposit accounts. Public funds in 1996 increased 94.7 percent from 1995 levels to $245.3 million primarily due to the conversion of a repurchase agreement into a time deposit in 1996 as well as an increase in deposits by a taxing authority.
1996 1995 ------------------------ ----------------------- Average Percent Average Percent Time Deposits Balance Change Cost Balance Change Cost - --------------------------------------------------------------------------- Savings and Interest- on-Checking $ 722,518 + .3% 1.36% $ 720,489 - 9.5% 1.76% Money market deposit accounts 810,616 +31.4 3.93 616,931 +12.7 3.84 Time accounts of $100,000 or more 460,196 + 2.0 4.95 450,959 +23.6 5.09 Time accounts under $100,000 586,675 +14.1 4.84 513,999 + 5.0 4.87 Public funds 245,266 +94.7 4.36 125,971 +46.3 4.33 ---------- ---------- Total $2,825,271 +16.3 3.66 $2,428,349 + 6.3 3.70 ========== ========== 1994 ------------------------- Average Percent Time Deposits Balance Change Cost - ------------------------------------------------- Savings and Interest- on-Checking $ 796,178 + 6.1% 1.81% Money market deposit accounts 547,237 + 2.3 2.87 Time accounts of $100,000 or more 364,997 - 2.8 3.35 Time accounts under $100,000 489,604 - 7.9 3.50 Public funds 86,132 +14.9 2.90 ---------- Total $2,284,148 + .7 2.71 ==========
Mexico is a part of the natural trade territory of the banking offices of Cullen/Frost. Thus, dollar-denominated foreign deposits from Mexican sources have traditionally been a significant source of funding. The Corporation's average foreign deposits increased 2.0 percent from 1995. The turbulent economic conditions which started with the peso devaluation in December 1994 have begun to stabilize somewhat in 1996 and the Mexican economic recovery and growth in manufacturing is expected to continue in 1997.
Foreign Deposits 1996 1995 1994 - ----------------------------------------------------------------------- Average balance $573,583 $562,191 $592,233 Percentage of total average deposits 14.7% 17.1% 19.0%
Short-Term Borrowings The Corporation's primary source of short-term borrowings is Federal funds purchased from correspondent banks and securities sold under repurchase agreements in the natural trade territories of the Cullen/Frost subsidiary banks, as well as from upstream banks. The conversion of a repurchase agreement into a time deposit in 1996 and deposit levels increasing during the year resulted in an offset position for the Corporation in Federal funds during the year.
1996 1995 1994 ---------------- ---------------- ---------------- Average Average Average Average Average Average Federal Funds Balance Rate Balance Rate Balance Rate - -------------------------------------------------------------------------------- Federal funds sold and securities purchased under resale agreements $ 138,811 5.21% $ 117,158 5.75% $108,762 3.81% Federal funds purchased and securities sold under repurchase agreements 144,804 4.79 251,392 5.29 191,611 3.74 --------- --------- -------- Net funds position $ (5,993) $(134,234) $(82,849) ========= ========= ========
Other funding sources include a $7,500,000 short-term line of credit to the parent Corporation used for short-term liquidity needs. There were no borrowings outstanding from this source at December 31, 1996 and 1995. Long-Term Borrowings During February 1997, the Corporation issued $100,000,000 of its 8.42 percent Capital Securities, Series A which represents a beneficial interest in Cullen/Frost Capital Trust I, a Delaware statutory business trust and wholly- owned subsidiary of the Corporation. The Issuer Trust will use the proceeds of the offering of the Capital Securities to purchase Junior Subordinated Debentures of Cullen/Frost. The Corporation will use the proceeds of the offering of the Junior Subordinated Debentures for general corporate purposes, which may include the reduction of short-term indebtedness, investments at the holding company level, investments in the capital of, or extensions of credit to, the Corporation's subsidiaries, acquisitions, and the repurchase of the Corporation's common stock. The Capital Securities will be included in the Tier 1 capital of Cullen/Frost for regulatory capital purposes and will be reported as debt on the balance sheet. See Note U "Subsequent Events" on page 51. Capital At December 31, 1996, shareholders' equity reached the highest level in the Corporation's history, $378,943,000, an increase of 11.0 percent from $341,464,000 at December 31, 1995. The increase in 1996 was due primarily to earnings growth partially offset by $18.1 million of dividends paid. The Corporation had an unrealized gain on securities available for sale, net of deferred taxes, of $7.6 million as of December 31, 1996 compared to $8.5 million as of December 31, 1995. Currently, under regulatory requirements, the unrealized gain or loss on securities available for sale is not included in the calculation of risk-based capital and leverage ratios. During the second quarter of 1996, the Corporation declared and distributed a two-for-one stock split and raised its cash dividend 20 percent to $.21 per common share compared to $.175 per common share in the first quarter of 1996. In addition, the Corporation announced that its Board of Directors had authorized it to repurchase up to 500,000 shares of its common stock from time to time. As of the date hereof, no shares have been repurchased. The Corporation paid a quarterly dividend of $.11 per common share during the first two quarters of 1995 increasing to $.175 per common share during the third and fourth quarters. The Federal Reserve Board utilizes capital guidelines designed to measure Tier 1 and Total Capital and take into consideration the risk inherent in both on-balance sheet and off-balance sheet items. For the Corporation's capital ratios at December 31, 1996 and 1995, see Note L "Capital" on page 43. Parent Corporation Historically, a large portion of the parent Corporation's income which provides funds for the payment of dividends to shareholders and for other corporate purposes has been derived from Cullen/Frost's investments in subsidiaries. Dividends received from the subsidiaries are based upon each bank's earnings and capital position. See Note K "Dividends" on page 43. Management fees are not assessed. Non-Banking Subsidiaries Cullen/Frost has three principal non-banking subsidiaries. Main Plaza Corporation occasionally makes loans to qualified borrowers. Such loans are typically funded with borrowings against Cullen/Frost's current cash or borrowing against credit lines. Daltex General Agency, Inc., a managing general insurance agency, provides vendor's single interest insurance for Cullen/Frost subsidiary banks. The New Galveston Company is a wholly-owned second tier bank holding company subsidiary which holds all shares of each banking and non-banking subsidiary. Management's Responsibility For Financial Reporting The management of Cullen/Frost Bankers, Inc. is responsible for the preparation of the financial statements, related financial data and other information in this annual report. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include amounts based on management's estimates and judgment where appropriate. Financial information appearing throughout this annual report is consistent with the financial statements. In meeting its responsibility both for the integrity and fairness of these financial statements and information, management depends on the accounting systems and related internal accounting controls that are designed to provide reasonable assurances that transactions are authorized and recorded in accordance with established procedures and that assets are safeguarded and that proper and reliable records are maintained. The concept of reasonable assurance is based on the recognition that the cost of a system of internal controls should not exceed the related benefits. As an integral part of the system of internal controls, Cullen/Frost maintains an internal audit staff which monitors compliance with and evaluates the effectiveness of the system of internal controls and coordinates audit coverage with the independent auditors. The Audit Committee of Cullen/Frost's Board of Directors, which is composed entirely of directors independent of management, meets regularly with management, regulatory examiners, internal auditors, the asset review staff and independent auditors to discuss financial reporting matters, internal controls, regulatory reports, internal auditing and the nature, scope and results of the audit efforts. Internal Audit and Asset Review report directly to the Audit Committee. The banking regulators, internal auditors and independent auditors have direct access to the Audit Committee. The consolidated financial statements have been audited by Ernst & Young LLP, independent auditors, who render an independent opinion on management's financial statements. Their appointment was recommended by the Audit Committee and approved by the Board of Directors and by the shareholders. The audit by the independent auditors provides an additional assessment of the degree to which Cullen/Frost's management meets its responsibility for financial reporting. Their opinion on the financial statements is based on auditing procedures, which include their consideration of the internal control structure and performance of selected tests of transactions and records, as they deem appropriate. These auditing procedures are designed to provide an additional reasonable level of assurance that the financial statements are fairly presented in accordance with generally accepted accounting principles in all material respects. /s/ T.C. FROST T.C. Frost Senior Chairman and Chief Executive Officer /s/ RICHARD W. EVANS, JR. Richard W. Evans, Jr. Chairman and Chief Operating Officer /s/ PHILLIP D. GREEN Phillip D. Green Executive Vice President and Chief Financial Officer Report Of Ernst & Young LLP Independent Auditors Shareholders And Board Of Directors Cullen/Frost Bankers, Inc. We have audited the accompanying consolidated balance sheets of Cullen/Frost Bankers, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cullen/Frost Bankers, Inc. and Subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Antonio, Texas February 7, 1997 except for Note U as to which date is March 13, 1997 Cullen/Frost Bankers, Inc. and Subsidiaries Graphic Picture Omitted Cullen/Frost Bankers, Inc. sunburst logo is across the middle of the page in an oblong shape slanted to the right. Consolidated Financial Statements and Notes to Consolidated Financial Statements
Consolidated Statements Of Operations Cullen/Frost Bankers, Inc. and Subsidiaries (dollars in thousands, except per share amounts) Year Ended December 31 ----------------------------- 1996 1995 1994 ------------------------------ Interest income: Loans, including fees $183,724 $150,497 $106,252 Securities: Taxable 99,237 98,521 94,760 Tax-exempt 325 341 349 ------------------------------ Total securities 99,562 98,862 95,109 Time deposits 1 2 2 Federal funds sold and securities purchased under resale agreements 7,226 6,732 4,146 ------------------------------ Total Interest Income 290,513 256,093 205,509 Interest expense: Deposits 103,475 89,809 61,996 Federal funds purchased and securities sold under repurchase agreements 6,937 13,296 7,166 Long-term notes payable and other borrowings 1,019 733 ------------------------------ Total Interest Expense 111,431 103,838 69,162 ------------------------------ Net Interest Income 179,082 152,255 136,347 Provision for possible loan losses 7,300 6,272 ------------------------------ Net Interest Income After Provision For Possible Loan Losses 171,782 145,983 136,347 Non-interest income: Trust fees 34,031 31,762 29,529 Service charges on deposit accounts 38,294 30,382 28,182 Other service charges, collection and exchange charges, commissions and fees 8,764 11,055 9,366 Net loss on securities transactions (980) (1,396) (4,038) Other 14,426 15,940 13,776 ------------------------------ Total Non-Interest Income 94,535 87,743 76,815 Non-interest expense: Salaries and wages 71,788 58,177 52,986 Pension and other employee benefits 15,351 10,905 9,910 Net occupancy of banking premises 18,782 17,992 15,777 Furniture and equipment 11,789 11,259 10,937 Intangible amortization 11,306 8,124 7,627 Other 51,564 55,992 58,325 ------------------------------ Total Non-Interest Expense 180,580 162,449 155,562 ------------------------------ Income Before Income Taxes 85,737 71,277 57,600 Income taxes 30,759 24,998 20,177 ------------------------------ Net Income $ 54,978 $ 46,279 $ 37,423 ============================== Net income per common share Primary $ 2.40 $ 2.04 $ 1.67 Fully diluted 2.39 2.03 1.67 Dividends .81 .57 .34 See notes to consolidated financial statements.
Consolidated Balance Sheets Cullen/Frost Bankers, Inc. and Subsidiaries (dollars in thousands, except per share amounts) December 31 ----------------------- 1996 1995 ----------------------- Assets Cash and due from banks $ 872,028 $ 533,333 Time deposits 64 Securities held to maturity (market value: 1996-$181,029; 1995-$214,962) 177,139 210,731 Securities available for sale 1,299,285 1,325,836 Federal funds sold and securities purchased under resale agreements 52,850 100,550 Loans, net of unearned discount of $1,154 in 1996 and $1,337 in 1995 2,252,150 1,816,762 Less: Allowance for possible loan losses (36,308) (31,577) ---------------------- Net loans 2,215,842 1,785,185 Banking premises and equipment 101,625 89,493 Accrued interest and other assets 169,615 155,019 ---------------------- Total Assets $4,888,384 $4,200,211 ====================== Liabilities Demand deposits: Commercial and individual $ 941,991 $ 792,879 Correspondent banks 337,996 127,549 Public funds 51,228 71,581 ---------------------- Total demand deposits 1,331,215 992,009 Time deposits: Savings and Interest-on-Checking 726,700 718,582 Money market deposit accounts 876,382 711,865 Time accounts 1,026,547 998,738 Public funds 281,750 224,539 ---------------------- Total time deposits 2,911,379 2,653,724 ---------------------- Total deposits 4,242,594 3,645,733 Federal funds purchased and securities sold under repurchase agreements 174,107 111,395 Accrued interest and other liabilities 92,740 101,619 ---------------------- Total Liabilities 4,509,441 3,858,747 Shareholders' Equity Common stock, par value $5 per share 112,410 55,997 Shares authorized: 1996-30,000,000; 1995-30,000,000 Shares outstanding: 1996-22,482,113; 1995-22,398,900 Surplus 63,480 118,418 Retained earnings 195,451 158,563 Unrealized gain on securities available for sale, net of tax 7,602 8,486 ---------------------- Total Shareholders' Equity 378,943 341,464 ---------------------- Total Liabilities and Shareholders' Equity $4,888,384 $4,200,211 ====================== See notes to consolidated financial statements.
Consolidated Statements Of Cash Flows Cullen/Frost Bankers, Inc. and Subsidiaries (dollars in thousands) Year Ended December 31 ------------------------------- 1996 1995 1994 ------------------------------- Operating Activities Net income $ 54,978 $ 46,279 $ 37,423 Adjustments to reconcile net income to net cash provided by operating activities: Provision (credit) for possible loan losses 7,300 6,272 Provision for real estate losses 610 Provision (credit) for deferred taxes (3,952) (1,150) 2,106 Accretion of discounts on loans (970) (1,870) (4,563) Accretion of securities' discounts (15,568) (17,031) (11,624) Amortization of securities' premiums 2,827 2,248 3,385 Net realized loss on securities transactions 980 1,396 4,038 Net gain on sale of assets (1,292) (5,297) (2,074) Depreciation and amortization 22,440 18,825 18,448 Increase in accrued interest receivable (2,850) (3,092) (2,603) Increase in accrued interest payable 876 2,763 1,629 Net change in other assets and liabilities (78) 35,936 974 ------------------------------ Net cash provided by operating activities 64,691 85,889 47,139 Investing Activities Proceeds from maturities of securities held to maturity 33,339 106,424 145,609 Purchases of securities held to maturity (833) (209,773) Proceeds from sales of securities available for sale 215,983 147,468 170,894 Proceeds from maturities of securities available for sale 545,960 677,915 343,330 Purchases of securities available for sale (648,729) (806,723) (451,883) Net increase in loan portfolio (232,375) (208,107) (207,741) Proceeds from sales of equipment 75 31 4,458 Purchases of premises and equipment (12,169) (6,352) (16,403) Proceeds from sales of repossessed properties 788 1,719 2,912 Net cash and cash equivalents received from bank acquisitions 19,198 8,734 (22,536) ------------------------------ Net cash used by investing activities (77,930) (79,724) (241,133) Financing Activities Net increase (decrease) in demand deposits, IOC accounts, and savings accounts 441,273 305,696 (34,165) Net increase (decrease) in certificates of deposit (182,067) 68,329 (25,210) Net increase (decrease) in Federal funds purchased and securities sold under repurchase agreements 62,712 (267,565) 206,116 Proceeds from employee stock purchase plan and options 325 691 3,061 Dividends paid (18,073) (12,723) (7,415) ------------------------------ Net cash provided by financing activities 304,170 94,428 142,387 ------------------------------ Increase (decrease) in cash and cash equivalents 290,931 100,593 (51,607) Cash and cash equivalents at beginning of year 633,947 533,354 584,961 ------------------------------ Cash and cash equivalents at end of year $924,878 $633,947 $533,354 ============================== See notes to consolidated financial statements.
Consolidated Statement Of Changes In Shareholders' Equity Cullen/Frost Bankers, Inc. and Subsidiaries (dollars in thousands) Unrealized Gain (Loss) on Securities Common Retained Available Stock Surplus Earnings for Sale Total ---------------------------------------------- Balance at January 1, 1994 $ 55,046 $113,385 $ 95,978 $ 9,124 $273,533 Net Income for 1994 37,423 37,423 Proceeds from employee stock purchase plan and options 537 2,553 (29) 3,061 Tax benefit related to exercise of stock options 256 256 Issuance of restricted stock 32 168 200 Loan payments from employee stock ownership plan 170 170 Restricted stock plan deferred compensation, net (89) (89) Adjustment to unrealized loss on securities available for sale, net of tax (11,702) (11,702) Cash dividend (7,415) (7,415) --------------------------------------------- Balance at December 31, 1994 55,615 116,362 126,038 (2,578) 295,437 Net Income for 1995 46,279 46,279 Proceeds from employee stock purchase plan and options 250 475 (34) 691 Tax benefit related to exercise of stock options 503 503 Issuance of restricted stock 132 1,078 1,210 Restricted stock plan deferred compensation, net (997) (997) Adjustment to unrealized gain on securities available for sale, net of tax 11,064 11,064 Cash dividend (12,723) (12,723) --------------------------------------------- Balance at December 31, 1995 55,997 118,418 158,563 8,486 341,464 Net Income for 1996 54,978 54,978 Proceeds from employee stock purchase plan and options 300 434 (409) 325 Tax benefit related to exercise of stock options 661 661 Issuance of restricted stock 15 65 80 Restricted stock plan deferred compensation, net 392 392 Adjustment to unrealized loss on securities available for sale, net of tax (884) (884) Cash dividend (18,073) (18,073) Two-for-one stock split 56,098 (56,098) ---------------------------------------------- Balance at December 31, 1996 $112,410 $ 63,480 $195,451 $ 7,602 $378,943 ============================================== See notes to consolidated financial statements.
Notes To Consolidated Financial Statements Cullen/Frost Bankers, Inc. and Subsidiaries Note A - Summary Of Accounting Policies Cullen/Frost Bankers, Inc. ("Cullen/Frost" or "the Corporation"), through its wholly-owned subsidiary banks provides a broad array of products and services throughout central and south Texas. In addition to general commercial banking, other products and services offered include trust and investment management, mortgage banking, asset-based lending, treasury management and item processing. The accounting and reporting policies followed by Cullen/Frost are in accordance with generally accepted accounting principles and conform to general practices within the banking industry. The more significant accounting and reporting policies are summarized below. Basis of Presentation The consolidated financial statements include the accounts of Cullen/Frost and its wholly-owned subsidiaries. Condensed parent company financial statements reflect investments in subsidiaries using the equity method of accounting. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to make prior years comparable. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Securities Securities are classified as held to maturity and carried at amortized cost when the Corporation has the intent and ability to hold the securities until maturity. Securities to be held for indefinite periods of time are classified as available for sale and stated at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. The adjusted carrying value of the specific security sold is used to compute gain or loss on the sale of securities. Declines in value other than temporary declines are adjusted against the security with a charge to operations. Loans Interest on loans is accrued and accreted to operations based on the principal amount outstanding. Interest on certain consumer loans is recognized over their respective terms using a method which approximates the interest method. Generally, loans are placed on a non-accrual status if principal or interest payments become 90 days past due and/or management deems the collectability of the principal and/or interest to be in question. Once interest accruals are discontinued, uncollected but accrued interest is charged to current year operations. Loans which are determined to be uncollectible are charged to the allowance for possible loan losses. The collectability of loans is continually reviewed by management. Allowance for Possible Loan Losses The allowance for possible loan losses is established through a provision for possible loan losses charged to current operations. The amount maintained in the allowance reflects management's continuing assessment of the potential losses inherent in the portfolio based on evaluations of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, and anticipated economic, political and regulatory conditions. On January 1, 1995, the Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosure." The allowance for possible loan losses related to loans that are impaired is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. Income on impaired loans is recognized in accordance with SFAS No. 118 which is based on the collectability of the principal amount. The adoption of the standard did not have a material impact on the Corporation's financial position or results of operation. Foreclosed Assets Foreclosed assets consist of property which has been formally repossessed. Collateral obtained through foreclosure is recorded at the lower of fair value less estimated selling costs or the underlying loan amounts. Write-downs are provided for subsequent declines in value. A loan is classified as in-substance foreclosure when the Corporation has taken possession of the collateral regardless of whether formal foreclosure proceedings take place. Banking Premises and Equipment Banking premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are generally computed on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are generally amortized over the lesser of the term of the respective leases or the estimated useful lives of the improvements. On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the present value of expected future cash flows from the use of the asset and its eventual disposition are less than the carrying amount of the asset, an impairment loss is recognized. The adoption did not have a material impact on financial position or results of operations. Intangible Assets The excess of cost over fair value of net assets of businesses acquired (goodwill) is amortized on a straight-line and accelerated basis (as appropriate) over periods generally not exceeding twenty-five years. Core deposit and other intangibles are amortized on an accelerated basis over their estimated remaining lives. Intangible assets are included in other assets. All such intangible assets are periodically evaluated as to the recoverability of their carrying value. Federal Income Taxes Cullen/Frost files a consolidated federal income tax return which includes the taxable income of all of its principal subsidiaries. Applicable federal income taxes of the individual subsidiaries are generally determined on a separate return basis. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting bases and the tax bases of assets and liabilities. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. Stock Option Plans On January 1, 1996 the Corporation adopted SFAS No. 123, "Accounting for Stock Based Compensation." The statement allows the continued use of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," (APB No. 25) and related Interpretations. Under APB No. 25, because the exercise price of the Corporation's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. SFAS No. 123 also allows for fair value method of accounting for employees stock options. The continued use of APB No. 25 requires pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. Stock Split The number of shares outstanding and related earnings per share amounts have been restated to retroactively give effect for the two-for-one stock split declared and distributed by the Corporation during the second quarter of 1996. Accounting Changes The following is a brief discussion of the SFAS pronouncements issued by the FASB in 1996 which apply to the Corporation. In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings based on a control-oriented "financial-components" approach. Under this approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. The provisions of SFAS No. 125 are effective for transactions occurring after December 31, 1996, except those provisions relating to repurchase agreements, securities lending, and other similar transactions and pledged collateral, which have been delayed until after December 31, 1997 by SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125, an amendment of FASB Statement No. 125." The adoption of these statements is not expected to have a material impact on financial position or results of operations. Note B - Acquisitions The transactions listed below have been accounted for as purchase transactions with the total cash consideration funded through internal sources. The purchase price has been allocated to the underlying assets and liabilities based on estimated fair value at the date of acquisition. Results of operations are included from the date of acquisition. 1996 Acquisitions S.B.T. Bancshares, Inc. - San Marcos On January 5, 1996, the Corporation paid approximately $17.7 million to acquire S.B.T. Bancshares, Inc., including its subsidiary, State Bank and Trust Company in San Marcos, Texas. Goodwill associated with the transaction amounted to approximately $6.5 million and will be amortized on a straight-line method over a 15-year life. Approximately $4.5 million of other intangibles associated with the acquisition will be amortized over their estimated lives ranging from five to ten years on an accelerated method. The Corporation acquired loans of approximately $51 million and deposits of approximately $112 million. Cullen/Frost's results of operations would not have been materially impacted if the S.B.T. Bancshares acquisition had occurred at the beginning of 1996, 1995 or 1994. Park National Bank - Houston On February 15, 1996, the Corporation paid approximately $33.5 million to acquire Park National Bank in Houston, Texas. Goodwill associated with the transaction amounted to approximately $9.2 million and will be amortized on a straight-line method over a 15-year life. Approximately $7.6 million of other intangibles associated with the acquisition will be amortized over their estimated lives ranging from five to ten years on an accelerated method. The Corporation acquired loans of approximately $157 million and deposits of approximately $225 million. Cullen/Frost's results of operations would not have been materially impacted if the Park National Bank acquisition had occurred at the beginning of 1996, 1995 or 1994. 1995 Acquisitions Valley Bancshares, Inc. - McAllen On April 4, 1995, the Corporation paid approximately $9.2 million to acquire Valley Bancshares, Inc., including its subsidiary, Valley National Bank in McAllen, Texas. Goodwill associated with the transaction amounted to approximately $1.7 million and is being amortized on a straight-line method over a 15-year life. Approximately $3.3 million of other intangibles associated with the acquisition are being amortized over their estimated lives ranging from six to ten years on an accelerated method. The Corporation acquired loans of approximately $28 million and deposits of approximately $49 million. Cullen/Frost's results of operations would not have been materially impacted if the Valley Bancshares acquisition had occurred at the beginning of 1995 or 1994. National Commerce Bank - Houston On May 19, 1995, the Corporation paid approximately $24.2 million to acquire National Commerce Bank in Houston, Texas. Goodwill associated with the transaction amounted to approximately $10.5 million and is being amortized on a straight-line method over a 15-year life. Approximately $5.1 million of other intangibles associated with the acquisition are being amortized over their estimated lives ranging from six to eleven years on an accelerated method. The Corporation acquired loans of approximately $95 million and deposits of approximately $101 million. Cullen/Frost's results of operations would not have been materially impacted if the National Commerce acquisition had occurred at the beginning of 1995 or 1994. Comerica Bank branches - San Antonio On July 21, 1995, the Corporation acquired the two San Antonio branches of Comerica Bank Texas. The Corporation acquired loans of approximately $2 million and deposits of approximately $34 million. 1994 Acquisitions Texas Commerce Bank - Corpus Christi On April 15, 1994, the Corporation acquired Texas Commerce Bank in Corpus Christi in exchange for Cullen/Frost Bank of Dallas, N.A. ("C/F Dallas"). The banks exchanged were of comparable asset size. C/F Dallas represented 4.6 percent of the Corporation's total assets at March 31, 1994. No gain or loss was recognized on this transaction. The exchange did not have a material effect on the operating results of the Corporation. Creekwood Capital Corporation - Houston Frost National Bank, lead bank of Cullen/Frost, paid approximately $5.1 million to acquire all of the capital stock of Creekwood Capital Corporation ("Creekwood") on December 2, 1994. Creekwood provides financing to small- and medium-sized companies in the form of senior, asset-based loans. This transaction added approximately $23 million in loans. Goodwill recorded as a result of the transaction approximated $2.3 million and will be amortized over ten years using the straight-line method. Cullen/Frost's results of operations would not have been materially impacted if the Creekwood acquisition had occurred at the beginning of 1994. Note C - Cash and Due From Banks Cullen/Frost subsidiary banks are required to maintain reserves with the Federal Reserve Bank which are equal to specified percentages of deposits. The average amounts of reserve and contractual balances were $73,813,000 for 1996 and $37,397,000 for 1995. Note D - Securities Securities A summary of the amortized cost and estimated fair value of securities is presented below.
December 31, 1996 ------------------------------------------------ Amortized Unrealized Unrealized Estimated (in thousands) Cost Gains Losses Fair Value - ---------------------------------------------------------------------------- Securities Held to Maturity: U.S. Government agencies and corporations $ 171,845 $ 3,642 $ 64 $ 175,423 States and political subdivisions 5,269 312 5,581 Other 25 25 ------------------------------------------------ Total $ 177,139 $ 3,954 $ 64 $ 181,029 ================================================ December 31, 1996 ------------------------------------------------ Amortized Unrealized Unrealized Estimated (in thousands) Cost Gains Losses Fair Value - ---------------------------------------------------------------------------- Securities Available for Sale: U.S. Treasury $ 231,326 $ 102 $ 77 $ 231,351 U.S. Government agencies and corporations 1,049,722 16,058 4,387 1,061,393 States and political subdivisions 180 3 4 179 Other 6,361 1 6,362 ------------------------------------------------ Total $1,287,589 $ 16,164 $ 4,468 $1,299,285 ================================================ December 31, 1995 ------------------------------------------------ Amortized Unrealized Unrealized Estimated (in thousands) Cost Gains Losses Fair Value - ---------------------------------------------------------------------------- Securities Held to Maturity: U.S. Government agencies and corporations $ 205,364 $ 4,014 $ 79 $ 209,299 States and political subdivisions 5,342 296 5,638 Other 25 25 ---------------------------------------------- Total $ 210,731 $ 4,310 $ 79 $ 214,962 ============================================== December 31, 1995 ------------------------------------------------ Amortized Unrealized Unrealized Estimated (in thousands) Cost Gains Losses Fair Value - ---------------------------------------------------------------------------- Securities Available for Sale: U.S. Treasury $ 223,263 $ 194 $ 223,457 U.S. Government agencies and corporations 1,083,509 17,777 $4,919 1,096,367 State and political subdivisions 184 3 2 185 Other 5,824 5 2 5,827 ---------------------------------------------- Total $1,312,780 $17,979 $4,923 $1,325,836 ==============================================
The amortized cost and estimated fair value of securities at December 31, 1996 are presented below by contractual maturity. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
December 31, 1996 ------------------------------------------------------------- Securities Held to Maturity Securities Available for Sale ------------------------------------------------------------- Amortized Estimated Amortized Estimated (in thousands) Cost Fair Value Cost Fair Value - --------------------------------------------------------------------------------------- Due in one year or less $ 50 $ 50 $ 193,355 $ 193,379 Due after one year through five years 135 136 38,146 38,148 Due after five years through ten years 1,832 1,849 30 29 Due after ten years 3,277 3,571 6,336 6,336 ------------------------- ------------------------ 5,294 5,606 237,867 237,892 Mortgage-backed securities and collateralized mortgage 171,845 175,423 1,049,722 1,061,393 obligations ------------------------- ------------------------ Total $ 177,139 $ 181,029 $1,287,589 $1,299,285 ========================= ========================
On November 15, 1995, the FASB staff issued a special report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." In accordance with provisions in this report, the Corporation took advantage of a one-time reassessment of the classification of all securities and reclassified securities with an amortized cost of $733,206,000 from the held to maturity category to the available for sale category. The unrealized loss on the securities at the time of the transfer was $2,351,000. Proceeds from sales of securities available for sale during 1996 were $215,983,000. During 1996, gross gains of $42,000 and gross losses of $1,022,000 were realized on those sales. Proceeds from sales of securities available for sale during 1995 were $147,468,000. During 1995, gross gains of $100,000 and gross losses of $1,496,000 were realized on those sales. Proceeds from sales of securities available for sale during 1994 were $170,894,000. During 1994, gross gains of $226,000 and gross losses of $4,264,000 were realized on those sales. The carrying value of securities pledged to secure public funds, trust deposits, securities sold under repurchase agreements and for other purposes as required or permitted by law amounted to $752,039,000 at December 31, 1996 and $342,003,000 at December 31, 1995. Note E - Loans and Allowance for Possible Loan Losses A summary of loans outstanding follows:
December 31 ------------------------- (in thousands) 1996 1995 - ------------------------------------------------------------------------------ Real estate: Construction $ 84,091 $ 54,168 Land 50,208 37,695 Permanent mortgages: Commercial 225,845 198,276 Residential 422,787 339,576 Other 260,603 208,190 Commercial and industrial 649,721 508,990 Consumer 491,072 402,169 Financial institutions 12,749 10,409 Foreign 45,562 43,847 Purchasing or carrying securities 1,812 1,711 Other 8,854 13,068 Unearned discount (1,154) (1,337) ------------------------ Total loans $2,252,150 $1,816,762 ========================
In the normal course of business, in order to meet the financial needs of its customers, the Corporation is a party to financial instruments with off- balance sheet risk. These include commitments to extend credit and standby letters of credit which commit the Corporation to make payments on behalf of customers when certain specified future events occur. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Corporation's normal credit policies. Collateral is obtained based on management's credit assessment of the customer. No material losses are anticipated as a result of these commitments. Commitments to extend credit and standby letters of credit amounted to $851,342,000 and $43,293,000, respectively, at December 31, 1996. Commitments to extend credit and standby letters of credit amounted to $631,887,000 and $39,911,000, respectively, at December 31, 1995. Commercial and industrial loan commitments represent approximately 77 percent and 78 percent of the total loan commitments outstanding at December 31, 1996 and 1995, respectively. The majority of the Corporation's real estate loans are secured by real estate in San Antonio. Mortgage loans of approximately $4.4 million and $7.3 million were held for sale by the Corporation and are included in residential permanent mortgages at December 31, 1996 and 1995, respectively. These loans are valued at the lower of cost or market, on an aggregate basis. In the normal course of business, Cullen/Frost subsidiary banks make loans to directors and officers of both Cullen/Frost and its subsidiaries. These loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. Loans made to directors and executive officers of Cullen/Frost and its significant subsidiaries, including loans made to their associates, amounted to $53,393,000 and $57,692,000 at December 31, 1996 and 1995, respectively. During 1996, additions to these loans amounted to $54,848,000, repayments totaled $57,336,000 and other changes totaled $1,811,000. These other changes consist primarily of changes in related-party status. Standby letters of credit extended to directors and executive officers of Cullen/Frost and its significant subsidiaries and their associates amounted to $684,000 and $1,386,000 at December 31, 1996 and 1995, respectively. A summary of the changes in the allowance for possible loan losses follows:
Year Ended December 31 ---------------------------------- (in thousands) 1996 1995 1994 - --------------------------------------------------------------------------------- Balance at the beginning of the year $31,577 $25,741 $26,298 Provision for possible loan losses 7,300 6,272 Changes related to disposition of bank subsidiary (2,684) Net charge-offs: Losses charged to the allowance (10,245) (4,681) (4,022) Recoveries 7,676 4,245 6,149 --------------------------------- Net (charge-offs) recoveries (2,569) (436) 2,127 --------------------------------- Balance at the end of the year $36,308 $31,577 $25,741 =================================
A loan within the scope of SFAS No. 114 is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled principal and interest payments. At December 31, 1996, the majority of the impaired loans were real estate loans and collectability was measured based on the fair value of the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is fully assured, in which case interest is recognized on the cash basis. Interest revenue recognized on impaired loans for 1996 and 1995 was $55,000 and $46,000, respectively. The total allowance for possible loan losses includes activity related to allowances calculated in accordance with SFAS No. 114 and activity related to other loan loss allowances determined in accordance with SFAS No. 5. The following is a summary of loans considered to be impaired:
December 31 -------------------- (in thousands) 1996 1995 - ------------------------------------------------------------------------ Impaired loans with no valuation reserve $4,333 $4,565 Impaired loans with a valuation reserve 4,547 -------------------- Total recorded investment in impaired loans $4,333 $9,112 ==================== Valuation reserve 712 The average recorded investment in impaired loans was $7,290,000 and $9,312,000 for the years ended December 31, 1996 and 1995, respectively.
Note F - Non-Performing Assets A summary of non-performing assets follows:
December 31 --------------------- (in thousands) 1996 1995 - --------------------------------------------------------------------------- Non-accrual and restructured loans $ 9,724 $14,646 Foreclosed assets 2,242 1,509 --------------------- $11,966 $16,155 =====================
Cullen/Frost recognized interest income on non-accrual and restructured loans of approximately $292,000, $165,000 and $247,000 in 1996, 1995 and 1994, respectively. Had these reduced earning and non-earning loans performed according to their original contract terms, Cullen/Frost would have recognized interest income of approximately $1,182,000 in 1996, $1,403,000 in 1995 and $1,082,000 in 1994. Note G - Banking Premises and Equipment A summary of banking premises and equipment follows:
December 31 -------------------------------------------------------------- 1996 1995 ----------------------------- ------------------------------ Accumulated Accumulated Depreciation Net Depreciation Net and Carrying and Carrying (in thousands) Cost Amortization Value Cost Amortization Value - --------------------------------------------------------------------------------------- Land $ 38,464 $ 38,464 $ 35,468 $35,468 Buildings 46,460 $17,291 29,169 40,443 $17,100 23,343 Furniture and equipment 77,664 60,363 17,301 71,505 56,258 15,247 Leasehold improvements 26,738 12,453 14,285 29,776 15,950 13,826 Construction in progress 2,406 2,406 1,609 1,609 ------------------------------------------------------------- Total banking premises and equipment $191,732 $90,107 $101,625 $178,801 $89,308 $89,493 =============================================================
Note H - Deposits A summary of deposits outstanding by category follows:
December 31 ---------------------------------- (in thousands) 1996 1995 - ------------------------------------------------------------------------------ Demand deposits $1,331,215 $ 992,009 Savings and Interest-on-Checking 726,700 718,582 Money market deposit accounts 876,382 711,865 Time accounts of $100,000 or more 478,397 467,652 Time accounts under $100,000 548,150 531,086 Other 281,750 224,539 -------------------------------- Total deposits $4,242,594 $3,645,733 ================================ Foreign deposits totaled $570,357,000 and $557,968,000 at December 31, 1996 and 1995, respectively.
Note I - Borrowed Funds Cullen/Frost has a $7,500,000 revolving credit facility with another financial institution. The line of credit bears interest at prime. There were no borrowings outstanding on this line at December 31, 1996 and 1995. The following table represents balances as they relate to securities sold under repurchase agreements:
Year Ended December 31 ---------------------- (in thousands) 1996 1995 - ---------------------------------------------------------------------------- Balance at year end $ 88,782 $ 60,946 Maximum month-end balance 105,992 312,054 For the year: Average daily balance 74,472 178,538
Note J - Common Stock and Earnings Per Common Share The weighted average number of shares used to compute per common share earnings for the years ended December 31, 1996, 1995 and 1994, including common stock equivalents where applicable, were:
December 31 ---------------------------------- 1996 1995 1994 ---------------------------------- Primary 22,905,742 22,675,648 22,445,822 Fully diluted 23,016,734 22,779,660 22,445,822
Note K - Dividends In the ordinary course of business Cullen/Frost is dependent upon dividends from its subsidiary banks to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. The amount of dividends that subsidiary banks may declare is subject to regulations. Without prior regulatory approval, the subsidiary banks had approximately $6,476,000 available for the payment of dividends to Cullen/Frost at December 31, 1996. Note L - Capital The table below reflects various measures of regulatory capital at year end:
December 31, 1996 December 31, 1995 ----------------- ------------------ (in thousands) Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------- Risk-Based Tier 1 Capital $ 307,285 11.58% $ 281,334 13.07% Tier 1 Capital Minimum requirement 106,114 4.00 86,126 4.00 Total Capital $ 340,485 12.83% $ 308,306 14.32% Total Capital Minimum requirement 212,228 8.00 172,252 8.00 Risk-adjusted assets, net of goodwill $2,652,846 $2,153,155 Leverage ratio 6.76% 6.94% Average equity as a percentage of average assets 7.98 8.20
In December of 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") established five capital tiers for depository institutions. Effective December 16, 1992, federal banking agencies adopted final rules relating to these tiers. At December 31, 1996 and 1995, the Corporation's subsidiary banks were considered "well capitalized" as defined by FDICIA, the highest rating, and the Corporation's capital ratios were in excess of "well capitalized" levels. A financial institution is deemed to be well capitalized if the institution has a total risk-based capital ratio of 10.0 percent or greater, a Tier 1 risk-based capital ratio of 6.0 percent or greater, and a Tier 1 leverage ratio of 5.0 percent or greater and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. The Corporation is subject to the regulatory capital requirements administered by the Federal Reserve Bank. Regulators can initiate certain mandatory actions, if the Corporation fails to meet the minimum requirements, that could have a direct material effect on the Corporation's financial statements. The Corporation and its subsidiary banks currently exceed all minimum capital requirements. Note M - Leases and Rental Agreements Rental expense for all leases amounted to $10,589,000, $9,842,000 and $8,822,000 for the years ended December 31, 1996, 1995 and 1994, respectively. A summary of the total future minimum rental commitments due under non- cancelable equipment leases and long-term agreements on banking premises at December 31, 1996 follows:
Total (in thousands) Commitments - ------------------------------------------------------------------------------ 1997 $10,745 1998 10,288 1999 9,266 2000 6,258 2001 4,062 Subsequent to 2001 18,273 ------- Total future minimum rental commitments $58,892 =======
It is expected that certain leases will be renewed, or equipment replaced with new leased equipment, as these leases expire. Note N - Employee Benefit Plans Retirement Plans- Cullen/Frost has a non-contributory defined benefit plan which covers substantially all employees who have completed at least one year of service and have attained the age of 21. Defined benefits are provided based on an employee's final average compensation, age at retirement and years of service. Cullen/Frost's funding policy is to contribute quarterly an amount necessary to satisfy the Employee Retirement Income Security Act (ERISA) funding standards. An eligible employee's right to receive benefits under the plan becomes fully vested upon the earlier of the date on which such employee has completed five years of service or the date on which such employee attains 65 years of age. Retirement benefits under the plan are paid to vested employees upon their (i) normal retirement at age 65 or later or (ii) early retirement at or after age 55, but before age 65. In addition, Cullen/Frost has a Restoration of Retirement Income Plan (providing benefits in excess of the limits under Section 415 of the Internal Revenue Code of 1986, as amended) for eligible employees which is designed to comply with the requirements of ERISA and the entire cost of which is provided by Cullen/Frost contributions. Both plans, as amended, provide for the payment of monthly retirement income pursuant to a formula based on an eligible employee's highest three consecutive years of final average compensation during the last ten consecutive years of employment. The funded status of the plans and the amounts recognized in Cullen/Frost's consolidated balance sheets at December 31, 1996 and 1995 are presented below:
(in thousands) 1996 1995 - --------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $28,432 in 1996 and $25,441 in 1995 $29,934 $26,638 ================= Projected benefit obligation for service rendered to date $44,796 $39,808 Plan assets at fair value (primarily listed stocks and U.S. and corporate bonds) 31,676 24,991 ----------------- Projected benefit obligation in excess of plan assets 13,120 14,817 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions (7,608) (7,775) Unrecognized prior service cost (4,849) (5,407) Unrecognized net transitional asset 690 790 ----------------- Accrued pension cost included in other liabilities $ 1,353 $ 2,425 =================
Net pension cost included the following components:
(in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- Service cost for benefits earned during the year $2,035 $1,731 $1,444 Actual return on plan assets, net of expenses (2,755) (3,837) 388 Interest cost on projected benefit obligation 2,947 2,607 2,306 Net amortization and deferral 1,715 2,788 (1,326) --------------------------- Net pension cost $3,942 $3,289 $2,812 ===========================
The weighted-average discount rate used for calculating the pension obligation at December 31, 1995 and for calculating the net periodic pension cost for 1996 was 7.5 percent, and the assumed rate of future compensation increases was 5 percent. The discount rate used for calculating the pension obligation at December 31, 1996 was 7.5 percent, and the assumed rate of future compensation increases was 5 percent. These assumptions will be used for calculating the 1997 net periodic pension cost. The expected long-term rate of return on plan assets for 1996, 1995, and 1994 was 9 percent. Effective January 1, 1994, the Corporation adopted a supplemental executive retirement plan ("SERP") for certain key executives. The plan provides for target retirement benefits, as a percentage of pay, beginning at age 55. The target percentage is 45 percent of pay at age 55, increasing to 60 percent at age 60 and later. Benefits under the SERP are reduced, dollar-for- dollar, by benefits received under the Retirement and Restoration Plans, described above, and any social security benefits. Savings Plans - The Corporation maintains a 401(k) stock purchase plan (the "401(k) Plan"). The 401(k) Plan permits each participant to make before- or after-tax contributions up to 16 percent of eligible compensation. Cullen/Frost makes matching contributions to the 401(k) Plan based on the amount of each participant's contributions up to a maximum of six percent of eligible compensation. Eligible employees must complete 90 days of service to be eligible for enrollment and vest in the Corporation's matching contributions over a five-year period. The Corporation's gross expenses related to the 401(k) Plan were $1,965,000, $1,521,000 and $1,296,000 for 1996, 1995 and 1994, respectively. During 1996, 1995 and 1994, the Corporation utilized forfeitures of $449,000, $1,439,000 and $539,000, respectively, to offset this expense. The 1991 Thrift Incentive Stock Purchase Plan ("1991 Stock Purchase Plan") was adopted to offer those employees whose participation in the 401(k) Plan is limited an alternative means of receiving comparable benefits. The Corporation's expenses related to the 1991 Stock Purchase Plan were $754,000, $595,000 and $574,000 for 1996, 1995 and 1994, respectively. Executive Stock Plans - The Corporation has four executive stock plans, the 1983 Nonqualified Stock Option Plan ("1983 Plan"), the 1988 Nonqualified Stock Option Plan ("1988 Plan"), the Restricted Stock Plan, and the 1992 Stock Plan. The 1992 Stock Plan is an all-inclusive plan, with an aggregate of 1,760,000 shares of common stock authorized for award. The 1992 Stock Plan has replaced all other previously approved executive stock plans. In general, options awarded have a ten-year life with a five-year vesting period. These plans which were approved by shareholders were established to enable the Corporation to retain and motivate key employees. A committee of non-participating directors has sole authority to select the employees, establish the awards to be issued, and approve the terms and conditions of each award contract. The 1992 Stock Plan allows the Corporation to grant restricted stock, incentive stock options, nonqualified stock options, stock appreciation rights, or any combination thereof to certain key executives of the Corporation. The following is a summary of option transactions in each of the last three years.
1983 Plan 1988 Plan 1992 Plan ----------------- ----------------- ---------------- Weighted Weighted Weighted Options Average Options Average Options Average Price Price Price - ---------------------------------------------------------------------------------- Balance, Dec. 31, 1993 124,056 $4.92 320,912 $5.05 351,144 $16.49 Granted 321,000 18.06 Exercised 22,078 4.93 33,768 4.63 2,738 12.73 Canceled 17,894 5.31 16,344 15.37 ------------------------------------------------------ Balance, Dec. 31, 1994 101,978 4.92 269,250 5.09 653,062 17.08 Granted 204,000 22.88 Exercised 43,936 5.12 34,652 4.46 23,742 15.77 Canceled 2,508 5.46 1,804 5.46 5,254 16.05 ------------------------------------------------------ Balance, Dec. 31, 1995 55,534 4.73 232,794 5.18 828,066 18.55 Granted 403,000 30.14 Exercised 13,036 4.14 53,958 5.14 38,906 17.73 Canceled 5,868 5.46 788 5.46 21,234 19.05 ------------------------------------------------------ Balance, Dec. 31, 1996 36,630 $4.83 178,048 $5.20 1,170,926 $22.56 ====================================================== At Dec. 31, 1996 Per Share Price Range $3.41-$5.46 $3.01-$5.46 $12.73-$18.13* 22.88- 30.25** Weighted-Average Remaining Contractual Life 3.7 Years 4.5 Years 7.2 Years* 9.2 Years** * Includes 574,926 options of which 200,000 are exercisable both with a weighted-average exercise price of $17.14. **Includes 596,000 options of which 100,000 are exercisable both with a weighted-average exercise price of $27.79.
There were 533,473, 405,916 and 308,520 shares exercisable for 1996, 1995, and 1994 with a weighted-average exercise price of $12.43, $10.39 and $7.72, respectively. In accounting for the impact of issuing stock options, the Corporation has elected not to follow the recognition requirements of SFAS No. 123, which requires fair value accounting, but will rather continue to follow the requirements of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related Interpretation. SFAS No. 123 requires disclosure of pro forma net income and earnings per share information assuming that stock options granted in 1995 and 1996 have been accounted for in accordance with the fair value requirements of SFAS No. 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have characteristics which are different from the Corporation's employee stock options. In addition, option valuation models require the input of highly subjective assumptions which can significantly impact the estimated fair value. As such, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options. The following weighted-average assumptions were used for 1996 and 1995, respectively: risk-free interest rates of 6.50 percent and 6.33 percent; dividend yield of 2.50 percent; volatility factors of the expected market price of the Corporation's common stock of 21 percent and 24 percent and weighted- average expected lives of the options of 8 years. For purposes of proforma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Corporation's proforma information as if compensation expense had been recognized in accordance with SFAS No. 123 is summarized below:
(in thousands except for earnings per share information) 1996 1995 - ------------------------------------------------------------------------------------------ Proforma Net income* $54,692 $46,231 Proforma earnings per common share Primary $ 2.44 $ 2.07 Fully diluted 2.43 2.07 *Because SFAS No. 123 is applicable only to options granted subsequent to December 31, 1994, its proforma effect on 1996 is not necessarily indicative of its impact on future years.
In 1996, restricted stock grants of 3,000 shares were awarded under the 1992 Stock Plan. Restricted stock grants awarded under the 1992 Stock Plan totaled 52,900 and 12,750 shares for 1995 and 1994, respectively. Deferred compensation expense related to the restricted stock was $472,000 in 1996, $213,000 in 1995, and $111,000 in 1994. The market value of restricted shares at the date of grant is expensed over the restriction period. The Corporation has change-in-control agreements with 18 of its executives. Under eight of these agreements, as revised, each covered person could receive, in the event of a change in control, one-half of his base compensation upon the effectiveness of the change in control, and from one and one-half times up to 2.49 times (depending on the executive) of his average annual W-2 compensation during the previous five years if such person is constructively terminated or discharged for reasons other than cause within two years following the change in control. Under the remaining ten agreements, each covered person could receive from two times up to 2.99 times (depending on the executive) of his average W-2 compensation during the previous five years if such person is constructively terminated or discharged for reasons other than cause within two years following the change in control. These agreements, other than certain instances of stock appreciation and SERPS, limit payments to avoid being considered "parachute payments" as defined by the Internal Revenue Code. The maximum contingent liability under these agreements approximated $8,454,000 at December 31, 1996. The Corporation has no material liability for post-retirement or post- employment benefits other than pensions. Note O - Income Taxes The following is an analysis of the Corporation's income taxes included in the consolidated statements of operations for the years ended December 31, 1996, 1995, and 1994.
(in thousands) 1996 1995 1994 - --------------------------------------------------------------------- Current income tax expense $34,711 $26,148 $18,071 Deferred income tax (3,952) (1,150) 2,106 -------------------------------- Income tax expense as reported $30,759 $24,998 $20,177 ================================
The following is a rconciliation of the difference between income tax expense as reported and the amount computed by applying the statutory income tax rate to income before income taxes:
Year Ended December 31 ------------------------------ (in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- Income before income taxes $85,737 $71,277 $57,600 Statutory rate 35% 35% 35% ---------------------------- Income tax expense at the statutory rate 30,008 24,947 20,160 Effect of tax-exempt interest (677) (565) (406) Amortization of goodwill 778 437 151 Other 650 179 272 ---------------------------- Income tax expense as reported $30,759 $24,998 $20,177 ============================ Tax benefits related to security transactions $ 343 $ 489 $ 1,413 ============================
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 1996, and 1995 are presented below:
(in thousands) 1996 1995 - ---------------------------------------------------------------------------- Deferred tax assets: Allowance for possible loan losses $13,341 $11,432 Building modification reserve 1,592 1,592 Gain on sale of assets 1,172 1,289 Intangibles 1,280 Net occupancy restructuring 801 1,197 Other 1,458 1,658 ------------------- Total gross deferred tax assets 18,364 18,448 Deferred tax liabilities: Bank premises and equipment $ (352) $ (871) Prepaid expenses (622) (670) Unrealized gain on securities available for sale (4,093) (4,570) Intangibles (1,659) Other (990) (700) ------------------- Total gross deferred tax liabilities (7,716) (6,811) ------------------- Net deferred tax asset $10,648 $11,637 ===================
At December 31, 1996 and 1995, no valuation allowance for deferred tax assets was necessary because they were supported by recoverable taxes paid in prior years. Note P - Non-Interest Expense Significant components of other non-interest expense for the years ended December 31, 1996, 1995, and 1994 are presented below:
Year Ended December 31 ----------------------------- Other Non-Interest Expense (in thousands) 1996 1995 1994 - --------------------------------------------------------------------------- Outside computer service $ 7,546 $ 8,108 $ 8,918 FDIC insurance 2 3,624 6,926 Other professional expenses 3,760 2,729 2,920 Armored motor service 3,098 2,722 2,220 Stationery printing and supplies 4,103 3,394 2,722 Postage and express 2,856 2,390 2,183 Management fee expense 2,364 2,071 1,816 Telephone 2,452 1,985 1,767 Other 25,383 28,969 28,853 ----------------------------- Total $51,564 $55,992 $58,325 =============================
Note Q - Cash Flow Data For purposes of reporting cash flow, cash and cash equivalents include the following:
December 31 ------------------------------ (in thousands) 1996 1995 1994 - --------------------------------------------------------------------------- Cash and due from banks $872,028 $533,333 $365,792 Time deposits 64 12 Federal funds sold and securities purchased under resale agreements 52,850 100,550 167,550 ------------------------------ $924,878 $633,947 $533,354 ==============================
Generally, Federal funds are sold for one-day periods and securities purchased under resale agreements are held for less than thirty-five days. Supplemental cash flow information is as follows:
Year Ended December 31 --------------------------------- (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------ Cash paid: Interest $110,555 $101,075 $ 67,533 Income Taxes 32,771 25,399 17,020 Non-cash items: Loans originated to facilitate the sale of foreclosed assets 848 2,059 1,717 Loan foreclosures 2,883 1,883 422 Swap of C/F Dallas for Texas Commerce Bank- Corpus Christi 2,599
Note R - Fair Values of Financial Instruments Fair Values of Financial Instruments - SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. SFAS No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. This disclosure does not and is not intended to represent the fair value of the Corporation. The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments. Cash and cash equivalents: The carrying amounts reported in the consolidated balance sheet for cash and short-term investments approximate their fair value. Interest-bearing deposits in other banks: The carrying amount reported in the consolidated balance sheet approximates the estimated fair value. Securities: Estimated fair values are based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar instruments. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for certain mortgage loans are based on quoted market prices of similar loans sold, adjusted for differences in loan characteristics. The fair value for other loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximated its fair value. Deposits: SFAS No. 107 defines the fair value of demand deposits as the amount payable on demand, and prohibits adjusting fair value for any deposit base intangible. The deposit base intangible is not considered in the fair value amounts. The carrying amounts for variable-rate money market accounts approximate their fair value. Fixed-term certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities. Short-term borrowings: The carrying amount reported in the consolidated balance sheet approximates the estimated fair value. Loan commitments, standby and commercial letters of credit: The Corporation's lending commitments have variable interest rates and "escape" clauses if the customer's credit quality deteriorates. Therefore the amounts committed approximate fair value. Interest rate swaps: The estimated fair value of the existing agreements are based on quoted market prices. The estimated fair values of the Corporation's financial instruments are as follows:
December 31 ------------------------------------------------- 1996 1995 ------------------------------------------------- Estimated Estimated Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value - ----------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 924,878 $ 924,878 $ 633,883 $ 633,883 Interest-bearing deposits in other banks 64 64 Securities 1,476,424 1,480,314 1,536,567 1,540,798 Loans 2,252,150 2,256,628 1,816,762 1,822,864 Allowance for loan losses (36,308) (31,577) ------------------------------------------------- Net loans 2,215,842 2,256,628 1,785,185 1,822,864 Financial liabilities: Deposits 4,242,594 4,240,979 3,645,733 3,645,935 Short-term borrowings 203,189 203,189 134,741 134,741 Off-balance sheet instruments: Interest rate swaps (1,061) (3,824)
Note S - Derivative Financial Instruments During 1996, the Corporation continued its strategy of entering into off- balance sheet interest rate swaps to hedge its interest rate risk by essentially converting fixed-rate loans into synthetic variable-rate instruments. These swap transactions allow management to structure the interest rate sensitivity of the asset side of the Corporation's balance sheet to more closely match its view of the interest rate sensitivity of the Corporation's funding sources. The Corporation had 31 interest rate swaps at December 31, 1996 with a notional amount of $251 million compared to 12 interest rate swaps at December 31, 1995 with a notional amount of $143 million. Each swap was a hedge against a specific commercial fixed-rate loan or against a specific pool of consumer fixed-rate loans with lives ranging from two to ten years where the Corporation pays a fixed rate and receives a floating rate. In each case, the amortization of the interest rate swap generally matches the expected amortization of the underlying loan or pool of loans. Each counterpart to a swap transaction has a credit rating that is investment grade. The net amount payable or receivable under these interest rate swap contracts is accrued as an adjustment to interest income and is not considered material in 1996 or 1995. The Corporation's credit exposure on interest rate swaps is limited to the net favorable value of all swaps to each counterparty. In such cases collateral is required from the counterparties involved if the net value of the swaps exceeds a nominal amount considered to be immaterial. At December 31, 1996, the Corporation's credit exposure relating to interest rate swaps was immaterial. Note T - Contingencies Certain subsidiaries of Cullen/Frost are defendants in various matters of litigation which have arisen in the normal course of conducting a commercial banking business. In the opinion of management, the disposition of such pending litigation will not have a material effect on Cullen/Frost's consolidated financial position. Note U - Subsequent Events Capital Securities Cullen/Frost Capital Trust I, a Delaware statutory business trust (the "Issuer Trust") and wholly-owned subsidiary of the Corporation, issued on February 6, 1997 $100,000,000 of its 8.42 percent Capital Securities, Series A (the "Capital Securities"), which represent beneficial interests in the Issuer Trust in an offering exempt from registration under the Securities Act of 1933 pursuant to Rule 144A. The Capital Securities will mature on February 1, 2027 and are redeemable in whole or in part at the option of the Corporation at any time after February 1, 2007 with the approval of the Federal Reserve and in whole at any time upon the occurrence of certain events affecting their tax or regulatory capital treatment. The Issuer Trust used the proceeds of the offering of the Capital Securities to purchase Junior Subordinated Debentures of the Corporation which constitute its only assets and which have terms substantially similar to the Capital Securities. The Capital Securities are guaranteed on a subordinated basis in certain limited respects by the Corporation pursuant to a Guarantee. The Corporation has also entered into an Agreement as to Expenses and Liabilities with the Issuer Trust pursuant to which it has agreed on a subordinated basis to pay any costs, expenses or liabilities of the Issuer Trust other than those arising under the Capital Securities. The obligations of the Corporation under the Junior Subordinated Debentures, the related Indenture, the trust agreement establishing the Issuer Trust, the Guarantee and the Agreement as to Expenses and Liabilities, in the aggregate, constitute a full and unconditional guarantee by the Corporation of the Issuer Trust's obligations under the Capital Securities. The Corporation will use the proceeds of the offering of the Junior Subordinated Debentures for general corporate purposes, which may include the reduction of short-term indebtedness, investments at the holding company level, investments in the capital of, or extensions of credit to, the Corporation's subsidiaries, acquisitions and the repurchase of the Corporation's common stock. The Capital Securities will be included in the Tier 1 capital of the Corporation for regulatory capital purposes and will be reported as debt on the balance sheet. The Corporation will record distributions payable on the Capital Securities as interest expense. The Corporation has the right to defer payments of interest on the Junior Subordinated Debentures at any time or from time to time for a period of up to ten consecutive semi-annual periods with respect to each deferral period. Under the terms of the Junior Subordinated Debentures, in the event that under certain circumstances there is an event of default under the Junior Subordinated Debentures or the Corporation has elected to defer interest on the Junior Subordinated Debentures, the Corporation may not, with certain exceptions, declare or pay any dividends or distributions on its capital stock or purchase or acquire any of its capital stock. On March 13, 1997, the Corporation and Cullen/Frost Capital Trust I, filed a Registration Statement (S-4) with the Securities and Exchange Commission to register under the Securities Act of 1933 the exchange of up to $100,000,000 aggregate Liquidation Amount of "new" 8.42 percent Capital Securities, Series A. Under the S-4, the "old" Capital Securities, Series A described above may be tendered for exchange in whole or in part in a liquidation amount of $100,000 or any integral multiple of $1,000 in excess thereof for "new" Capital Securities, Series A. The "new" Capital Securities, Series A will have the same terms as the "old" Capital Securities, Series A. This exchange will enhance the transferability of the Capital Securities and will have no impact on redemption of the Capital Securities, the Junior Subordinated Debentures issued by the Company, the Company's guarantee of the Capital Securities, or other matters described above. 1997 Acquisitions Corpus Christi Bancshares, Inc. - Corpus Christi On March 7, 1997, the Corporation paid approximately $32.2 million to acquire Corpus Christi Bancshares, Inc., including its subsidiary, Citizens State Bank in Corpus Christi, Texas. Total intangible assets associated with the transaction amounted to approximately $21.4 million. The Corporation acquired loans of approximately $108 million and deposits of approximately $184 million. Note V - Condensed Parent Corporation Financial Statements Condensed financial information of the parent Corporation as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 follows:
Year Ended December 31 -------------------------------- Statement of Operations (in thousands) 1996 1995 1994 - --------------------------------------------------------------------------------------- Income: Dividends from second tier bank holding company subsidiary $65,173 $56,631 $21,373 Interest and other 713 1,101 537 ------------------------------- Total Income 65,886 57,732 21,910 Expenses: Salaries and employee benefits 4,096 1,051 2,450 Other 1,005 1,375 2,025 ------------------------------- Total Expenses 5,101 2,426 4,475 Income Before Income Tax Credits and Equity in Undistributed Net Income of Subsidiaries 60,785 55,306 17,435 Income tax credits 1,216 375 678 Equity in undistributed net income of subsidiaries (7,023) (9,402) 19,310 ------------------------------- Net Income $54,978 $46,279 $37,423 =============================== December 31 ------------------------ Balance Sheets (in thousands) 1996 1995 - -------------------------------------------------------------------------------------- Assets Cash and time deposits $ 454 $ 350 Securities purchased under resale agreements 47,020 54,300 Loans to non-bank subsidiaries 212 1,198 Investments in second tier bank holding company subsidiary 337,504 292,026 Other 1,947 1,308 ------------------------ Total Assets $387,137 $349,182 ======================== Liabilities Other $ 8,194 $ 7,718 ------------------------ Total Liabilities 8,194 7,718 Shareholders' Equity 378,943 341,464 ------------------------ Total Liabilities and Shareholders' Equity $387,137 $349,182 ======================== Year Ended December 31 -------------------------------- Statements of Cash Flows (in thousands) 1996 1995 1994 - ----------------------------------------------------------------------------------------- Operating Activities Net income $ 54,978 $ 46,279 $ 37,423 Adjustments to reconcile net income to net cash provided by operating activities: Net income of subsidiaries (58,150) (47,229) (40,683) Dividends from subsidiaries 65,173 56,631 21,373 Net change in other liabilities and assets 971 1,578 2,893 ------------------------------- Net cash provided by operating activities 62,972 57,259 21,006 Investing Activities Capital contributions to subsidiaries (53,386) (9,470) (1,239) Net decrease in loans 986 242 758 ------------------------------- Net cash used by investing activities (52,400) (9,228) (481) Financing Activities Proceeds from employee stock purchase plans and options 325 691 3,061 Cash dividends (18,073) (12,723) (7,415) ------------------------------- Net cash used by financing activities (17,748) (12,032) (4,354) ------------------------------- Increase (decrease) in cash and cash equivalents (7,176) 35,999 16,171 Cash and cash equivalents at beginning of year 54,650 18,651 2,480 ------------------------------- Cash and cash equivalents at end of year $ 47,474 $ 54,650 $ 18,651 ===============================
Financial Statistics Cullen/Frost Bankers, Inc. and Subsidiaries (in thousands) The following unaudited schedules and statistics are presented for additional information and analysis.
1996/1995 -------------------------------- Increase (Decrease) Due to Change in Total ------------------- or Net Average Average Increase Rate/Volume Analysis Rate Balance (Decrease) - ------------------------------------------------------------------------------------- Changes in interest earned on: Time deposits $ (1) $ (1) Securities: U.S. Treasury (1,513) $ 2,420 907 U.S. Government agencies and corporations 2,884 (2,867) 17 States and political subdivisions Tax-exempt 11 (37) (26) Taxable Other (50) (154) (204) Federal funds sold and securities purchased under resale agreements (673) 1,167 494 Loans (2,438) 35,787 33,349 ------------------------------- Total (1,780) 36,316 34,536 Changes in interest paid on: Savings, Interest-on-Checking 2,903 (35) 2,868 Money market deposits accounts (552) (7,591) (8,143) Time accounts and public funds 823 (9,214) (8,391) Federal funds purchased and securities sold under repurchase agreements 1,156 5,203 6,359 Long-term notes payable and other borrowings 82 (368) (286) ------------------------------- Total 4,412 (12,005) (7,593) ------------------------------- Changes in net interest income $ 2,632 $ 24,311 $ 26,943 =============================== The allocation of the rate/volume variance has been made on a pro-rata basis assuming absolute values. The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate.
1995/1994 -------------------------------- Increase (Decrease) Due to Change in Total ------------------- or Net Average Average Increase Rate/Volume Analysis Rate Balance (Decrease) - ------------------------------------------------------------------------------------- Changes in interest earned on: Time deposits $ 1 $ (1) Securities: U.S. Treasury 3,659 (1,680) $ 1,979 U.S. Government agencies and corporations 6,400 (3,588) 2,812 States and political subdivisions Tax-exempt (14) (1) (15) Taxable (5) (5) Other 211 (1,236) (1,025) Federal funds sold and securities purchased under resale agreements 2,245 341 2,586 Loans 14,844 29,647 44,491 ------------------------------- Total 27,346 23,477 50,823 Changes in interest paid on: Savings, Interest-on-Checking 426 1,339 1,765 Money market deposits accounts (5,780) (2,186) (7,966) Time accounts and public funds (16,010) (5,602) (21,612) Federal funds purchased and securities sold under repurchase agreements (3,497) (2,633) (6,130) Long-term notes payable and other borrowings (733) (733) ------------------------------- Total (24,861) (9,815) (34,676) ------------------------------- Changes in net interest income $ 2,485 $ 13,662 $ 16,147 =============================== The allocation of the rate/volume variance has been made on a pro-rata basis assuming absolute values. The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate.
December 31, 1996 --------------------------------------------- Due in After One, After One Year but Within Five Loan Maturity and Sensitivity or Less Five Years Years Total - ------------------------------------------------------------------------------------------ Real estate construction and land loans $ 62,258 $ 52,720 $ 19,321 $ 134,299 Other real estate loans 119,512 179,788 228,390 527,690 All other loans 385,604 265,363 67,731 718,698 --------------------------------------------- Total $567,374 $497,871 $315,442 $1,380,687 ============================================= Loans with fixed interest rates $176,919 $161,115 $135,236 $ 473,270 Loans with floating interest rates 390,455 336,756 180,206 907,417 --------------------------------------------- Total $567,374 $497,871 $315,442 $1,380,687 ============================================= Loans for 1-4 family housing totaling $381,545,000 and consumer loans totaling $491,072,000 and unearned income of $1,154,000 are not included in the amounts in the table.
Maturity Distribution and Securities Portfolio Yields (dollars in thousands) December 31, 1996 - ------------------------------------------------------------------------------------------ Maturity ---------------------------------------------------------------------- Within 1 Year 1-5 Years 5-10 Years --------------------- ---------------------- ----------------------- Weighted Weighted Weighted Amount Average Yield Amount Average Yield Amount Average Yield ---------------------------------------------------------------------- Held to maturity: U.S. Government agencies and corporations $ 2,633 8.31% States and political subdivisions $ 50 4.50% $ 110 4.50% 1,833 6.20 Other 25 7.88 ------------------------------------------------------------------ Total securities held to maturity $ 50 4.50% $ 135 5.13% $ 4,466 7.44% ================================================================== Available for sale: U.S. Treasury $193,279 5.25% $ 38,072 5.69% U.S. Government agencies and corporations 367,493 5.83 $186,018 6.42% States and political subdivisions 100 5.37 51 5.00 28 5.62 Other 25 5.12 ------------------------------------------------------------------ Total securities available for sale $193,379 5.25% $405,641 5.82% $186,046 6.42% ================================================================== Weighted average yields have been computed on a fully taxable-equivalent basis assuming a tax rate of 35%. Maturity Distribution and Securities Portfolio Yields (dollars in thousands) December 31, 1996 - ----------------------------------------------------------------- Maturity --------------------------------------------- After 10 Years Total Carrying Amount --------------------- ---------------------- Weighted Weighted Amount Average Yield Amount Average Yield --------------------------------------------- Held to maturity: U.S. Government agencies and corporations $169,212 7.08% $ 171,845 7.10% States and political subdivisions 3,276 6.41 5,269 6.28 Other 25 7.87 ------------------------------------------ Total securities held to maturity $172,488 7.07% $ 177,139* 7.08% ========================================== Available for sale: U.S. Treasury $ 231,351 5.32% U.S. Government agencies and corporations $507,882 7.15% 1,061,393 6.56 States and political subdivisions 179 5.30 Other 6,337 6.00 6,362 6.01 ------------------------------------------ Total securities available for sale $514,219 7.13% $1,299,285* 6.34% ========================================== Weighted average yields have been computed on a fully taxable-equivalent basis assuming a tax rate of 35%. * Included in the totals are mortgage-backed securities and collateralized mortgage obligations of $1,233,238,000 which are included in maturity categories based on their stated maturity date.
Year Ended December 31 Federal Funds Purchased and Securities ----------------------------------- Sold Under Repurchase Agreements 1996 1995 1994 - ------------------------------------------------------------------------------------------ Balance at year end $174,107 $111,395 $370,235 Maximum month-end balance 226,867 367,154 370,235 For the year: Average daily balance 144,804 251,392 191,611 Average interest rate 4.79% 5.29% 3.74%
December 31 ------------------------------------------ 1996 1995 Remaining Maturity of Private ------------------- ------------------- Certificates of Deposit Percentage Percentage of $100,000 or More Amount of Total Amount of Total - ------------------------------------------------------------------------------------------ Three months or less $ 40,014 8.4% $ 52,512 11.2% After three, within six months 114,983 24.0 123,588 26.4 After six, within twelve months 164,166 34.3 164,722 35.3 After twelve months 159,234 33.3 126,830 27.1 ---------------------------------------- Total $478,397 100.0% $467,652 100.0% ======================================== Percentage of total private time deposits 18.2% 19.3% Other time deposits of $100,000 or more were $192,234,000 at December 31, 1996. Of this amount 70.8 percent matures within three months, 12.8 percent matures between three and six months and the remainder matures between six months and one year.
Quarterly Results of Operations Cullen/Frost Bankers, Inc. and Subsidiaries Three Months Ended 1996 ------------------------------------- (in thousands, except per share amounts) Mar 31 June 30 Sept 30 Dec 31 - ------------------------------------------------------------------------------------ Interest income $70,260 $72,131 $73,236 $74,886 Interest expense 27,592 27,757 27,786 28,296 Net interest income 42,668 44,374 45,450 46,590 Provision for possible loan losses 1,875 1,325 2,300 1,800 Gain (loss) on securities transactions (95) (903) 1 17 Non-interest income* 22,726 24,641 23,179 23,989 Non-interest expense 43,145 46,595 44,617 46,223 Income before income taxes 20,374 21,095 21,712 22,556 Income taxes 7,299 7,577 7,727 8,156 Net income 13,075 13,518 13,985 14,400 Net income per common share .57 .59 .61 .63 Three Months Ended 1995 ------------------------------------- (in thousands, except per share amounts) Mar 31 June 30 Sept 30 Dec 31 - ------------------------------------------------------------------------------------ Interest income $58,988 $63,915 $66,416 $66,774 Interest expense 22,776 26,564 27,278 27,220 Net interest income 36,212 37,351 39,138 39,554 Provision for possible loan losses 500 2,772 1,500 1,500 Gain (loss) on securities transactions 93 (1,489) Non-interest income* 20,417 22,743 21,066 23,518 Non-interest expense 39,770 39,932 40,309 42,438 Income before income taxes 16,359 17,390 18,395 19,134 Income taxes 5,720 6,167 6,442 6,670 Net income 10,639 11,223 11,953 12,464 Net income per common share .47 .50 .52 .55 * Includes gain (loss) on securities transactions.
Common Stock Market Prices and Dividends The Company's common stock trades on The Nasdaq Stock Market under the symbol: CFBI. The number of record holders of common stock at February 20, 1997 was 2,322.
1996 1995 ------------- ---------------- Market Price (per share) High Low High Low - ------------------------------------------------------------------------------ First Quarter $26.38 $23.38 $18.50 $14.88 Second Quarter 28.38 23.75 20.38 17.63 Third Quarter 30.88 25.50 24.13 20.25 Fourth Quarter 36.50 29.25 25.75 22.88
Market prices shown above are high and low sales prices as reported through NASDAQ National Market System. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commissions and represent actual transactions.
Cash Dividends (per share) 1996 1995 - ----------------------------------------------------------------------------- First Quarter $ .18 $ .11 Second Quarter .21 .11 Third Quarter .21 .17 Fourth Quarter .21 .18 --------------------- Total $ .81 $ .57 =====================
The Corporation's management is committed to the continuation of the payment of regular cash dividends, however there is no assurance as to future dividends because they are dependent on future earnings, capital requirements and financial conditions. See "Capital" section (page 28) in the Financial Review for further discussion.
Selected Financial Data Cullen/Frost Bankers, Inc. and Subsidiaries (dollars in thousands, except per share amounts) Year Ended December 31 --------------------------------------- 1996 1995 1994 --------------------------------------- Balance Sheet Data Total assets $ 4,888,384 $ 4,200,211 $ 3,793,720 Long-term notes payable Shareholders' equity 378,943 341,464 295,437 Average shareholders' equity to average total assets 7.98% 8.20% 7.85% Tier 1 capital ratio (1992 rules) 11.58 13.07 14.44 Total capital ratio (1992 rules) 12.83 14.32 15.69 Per Common Share Data Net income* $ 2.40 $ 2.04 $ 1.67 Cash dividends paid .81 .57 .34 Shareholders' equity 16.86 15.24 13.28 Loan Performance Indicators Non-performing assets $ 11,966 $ 16,155 $ 19,938 Non-performing assets to: Total loans plus foreclosed assets .53% .89% 1.34% Total assets .24 .38 .53 Allowance for possible loan losses $ 36,308 $ 31,577 $ 25,741 Allowance for possible loan losses to period-end loans 1.61% 1.74% 1.74% Net loan charge-offs (recoveries) $ 2,569 $ 436 $ (2,127) Net loan charge-offs (recoveries) to average loans .12% .03% (.16)% Common Stock Data Common shares outstanding at period end 22,482,113 22,398,900 22,246,124 Weighted average common and common equivalent shares outstanding 22,905,742 22,675,648 22,445,822 Dividends as a percentage of net income 32.87% 27.94% 20.12% Non-Financial Data Number of employees 2,306 2,019 1,862 Shareholders of record 2,336 2,463 2,553 * Fully diluted net income per share was $2.39 and $2.03 for 1996 and 1995, respectively. 1993 primary and fully diluted earnings per share before cumulative effect of an accounting change was $1.74. 1992 primary and fully diluted earnings per share before extraordinary credit was $.83. Fully diluted net income per share for 1992 was $1.13. Year Ended December 31 -------------------------------------- 1993 1992 1991 --------------------------------------- Balance Sheet Data Total assets $ 3,639,047 $ 3,150,871 $ 3,078,986 Long-term notes payable 13,400 14,668 Shareholders' equity 273,533 206,144 176,222 Average shareholders' equity to average total assets 7.08% 6.29% 5.67% Tier 1 capital ratio (1992 rules) 14.23 15.66 12.98 Total capital ratio (1992 rules) 15.49 17.52 15.04 Per Common Share Data Net income* $ 2.12 $ 1.13 $ .01 Cash dividends paid .08 Shareholders' equity 12.43 9.90 8.78 Loan Performance Indicators Non-performing assets $ 31,110 $ 51,303 $ 100,642 Non-performing assets to: Total loans plus foreclosed assets 2.47% 4.94% 8.85% Total assets .85 1.63 3.27 Allowance for possible loan losses $ 26,298 $ 31,897 $ 42,387 Allowance for possible loan losses to period-end loans 2.09% 3.10% 3.82% Net loan charge-offs (recoveries) $ (486) $ 15,988 $ 26,383 Net loan charge-offs (recoveries) to average loans (.04)% 1.53% 2.22% Common Stock Data Common shares outstanding at period end 22,018,396 20,824,368 20,087,688 Weighted average common and common equivalent shares outstanding 22,301,576 21,948,658 20,150,526 Dividends as a percentage of net income 3.54% Non-Financial Data Number of employees 1,877 1,754 1,737 Shareholders of record 2,644 2,824 3,547 * Fully diluted net income per share was $2.39 and $2.03 for 1996 and 1995, respectively. 1993 primary and fully diluted earnings per share before cumulative effect of an accounting change was $1.74. 1992 primary and fully diluted earnings per share before extraordinary credit was $.83. Fully diluted net income per share for 1992 was $1.13.
Bank Subsidiaries (in thousands) December 31, 1996 ---------------------------------- Total Total Total Assets Loans Deposits - --------------------------------------------------------------------------------------- Frost National Bank $4,761,806 $2,196,569 $4,120,973 San Antonio, Austin, Corpus Christi, Houston, McAllen, and San Marcos Main Office: P. O. Box 1600, 100 West Houston Street San Antonio, Texas 78296 (210)220-4011 United States National Bank 147,229 55,467 133,143 P. O. Box 179, 2201 Market Street Galveston, Texas 77553 (409)763-1151
Consolidated Statements of Operations Cullen/Frost Bankers, Inc. and Subsidiaries (in thousands, except per share amounts) Year Ended December 31 -------------------------------- 1996 1995 1994 - ----------------------------------------------------------------------------------- Interest Income: Loans, including fees $183,724 $150,497 $106,252 Securities 99,562 98,862 95,109 Time deposits 1 2 2 Federal funds sold and securities purchased under resale agreements 7,226 6,732 4,146 ------------------------------ Total Interest Income 290,513 256,093 205,509 Interest expense: Deposits 103,475 89,809 61,996 Federal funds purchased and securities sold under repurchase agreements 6,937 13,296 7,166 Long-term notes payable 1,019 733 Other borrowings ------------------------------ Total Interest Expense 111,431 103,838 69,162 ------------------------------ Net Interest Income 179,082 152,255 136,347 Provision (credit) for possible loan losses 7,300 6,272 ------------------------------ Net Interest Income After Provision (Credit) for Possible Loan Losses 171,782 145,983 136,347 Non-interest income: Trust department 34,031 31,762 29,529 Service charges on deposit accounts 38,294 30,382 28,182 Other service charges, collection and exchange charges, commissions and fees 8,764 11,055 9,366 Net gain (loss) on securities transactions (980) (1,396) (4,038) Other 14,426 15,940 13,776 ------------------------------ Total Non-Interest Income 94,535 87,743 76,815 Non-interest expense: Salaries and wages 71,788 58,177 52,986 Pension and other employee benefits 15,351 10,905 9,910 Net occupancy of banking premises 18,782 17,992 15,777 Furniture and equipment 11,789 11,259 10,937 Provision for real estate losses 610 Restructuring costs 400 830 Intangible Amortization 11,306 8,124 7,627 Other 51,564 54,982 57,495 ------------------------------ Total Non-Interest Expense 180,580 162,449 155,562 ------------------------------ Income Before Income Taxes (Credits), Extraordinary Credit and Cumulative Effect of Accounting Change 85,737 71,277 57,600 Income taxes (credits) 30,759 24,998 20,177 ------------------------------ Income before extraordinary credit and cumulative effect of accounting change 54,978 46,279 37,423 Extraordinary Credit-income tax benefit Cumulative effect of change in accounting for income taxes ------------------------------ Net Income $ 54,978 $46,279 $37,423 ============================== Net income per common share-primary $ 2.40 $ 2.04 $ 1.67 ============================== Return on average assets 1.22% 1.17% 1.02% Return on average equity 15.32 14.32 13.04
Consolidated Statements of Operations Cullen/Frost Bankers, Inc. and Subsidiaries (in thousands, except per share amounts) Year Ended December 31 -------------------------------- 1993 1992 1991 - ----------------------------------------------------------------------------------- Interest income: Loans, including fees $ 90,756 $ 84,074 $108,617 Securities 91,145 99,188 111,132 Time deposits 4 8 13 Federal funds sold and securities purchased under resale agreements 7,714 6,711 11,478 ------------------------------ Total Interest Income 189,619 189,981 231,240 Interest expense: Deposits 58,079 68,807 115,286 Federal funds purchased and securities sold under repurchase agreements 3,304 3,139 5,913 Long-term notes payable 410 1,378 1,502 Other borrowings 25 ------------------------------ Total Interest Expense 61,793 73,324 122,726 ------------------------------ Net Interest Income 127,826 116,657 108,514 Provision (credit) for possible loan losses (6,085) 5,498 23,166 ------------------------------ Net Interest Income After Provision (Credit) for Possible Loan Losses 133,911 111,159 85,348 Non-interest income: Trust department 26,278 21,861 20,030 Service charges on deposit accounts 27,303 23,663 20,455 Other service charges, collection and exchange charges, commissions and fees 7,972 6,183 6,748 Net gain (loss) on securities transactions 1,433 (232) 2,022 Other 13,243 10,338 8,227 ----------------------------- Total Non-Interest Income 76,229 61,813 57,482 Non-interest expense: Salaries and wages 53,654 46,184 44,154 Pension and other employee benefits 12,052 9,746 9,058 Net occupancy of banking premises 20,749 16,963 16,460 Furniture and equipment 10,155 8,295 7,726 Provision for real estate losses 1,445 12,963 7,653 Restructuring costs 10,285 Intangible Amortization 6,877 700 198 Other 56,861 52,299 56,743 ----------------------------- Total Non-Interest Expense 172,078 147,150 141,992 ----------------------------- Income Before Income Taxes (Credits), Extraordinary Credit and Cumulative Effect of Accounting Change 38,062 25,822 838 Income taxes (credits) (735) 8,197 633 ----------------------------- Income before extraordinary credit and cumulative effect of accounting change 38,797 17,625 205 Extraordinary Credit-income tax benefit 6,497 Cumulative effect of change in accounting for income taxes 8,439 ----------------------------- Net Income $47,236 $24,122 $ 205 ============================= Net income per common share - primary $ 2.12 $ 1.13 $ .01 ============================= Return on average assets 1.34% .79% .01% Return on average equity 19.00 12.56 .12
Consolidated Average Balance Sheets Cullen/Frost Bankers, Inc. and Subsidiaries (in thousands - taxable-equivalent basis) Year Ended December 31 ------------------------------ 1996 ------------------------------ Interest Average Income/ Yield/ Balance Expense Cost - --------------------------------------------------------------------------------- Assets: Time deposits $ 18 $ 1 2.93% Securities: U.S. Treasury 282,692 15,049 5.32 U.S. Government agencies and corporations 1,259,353 83,782 6.65 States and political subdivisions: Tax-exempt 5,470 517 9.45 Taxable Other 6,723 389 5.78 ---------- -------- Total securities 1,554,238 99,737 6.42 Federal funds sold and securities purchased under resale agreements 138,811 7,226 5.21 Loans, net of unearned discount 2,086,816 184,546 8.84 ---------- -------- Total Earning Assets and Average Rate Earned 3,779,883 291,510 7.71 Cash and due from banks 486,798 Allowance for possible loan losses (34,977) Banking premises and equipment 100,357 Accrued interest and other assets 164,434 ---------- Total Assets $4,496,495 ========== Liabilities: Demand deposits: Commercial and individual $ 832,356 Correspondent banks 198,750 Public funds 44,923 ---------- Total demand deposits 1,076,029 Time deposits: Savings and Interest-on-Checking 722,518 9,792 1.36 Money market deposit accounts 810,616 31,818 3.93 Time accounts 1,046,871 51,180 4.89 Public funds 245,266 10,685 4.36 ---------- -------- Total time deposits 2,825,271 103,475 3.66 ---------- Total deposits 3,901,300 Federal funds purchased and securities sold under repurchase agreements 144,804 6,937 4.79 Long-term notes payable Other borrowings 19,389 1,019 5.26 ---------- -------- Total Interest-Bearing Funds and Average Rate Paid 2,989,464 111,431 3.73 Accrued interest and other liabilities 72,165 -------- ---- ---------- Total Liabilities 4,137,658 Shareholders' Equity 358,837 ---------- Total Liabilities and Shareholders' Equity $4,496,495 ========== Net interest income $180,079 ======== Net interest spread 3.98% ==== Net interest income to total average earning assets 4.76% ==== The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1996 through 1993 and a 34 percent tax rate for 1992 through 1991. Non-accrual loans are included in the average loan amounts outstanding for these computations.
Consolidated Average Balance Sheets Cullen/Frost Bankers, Inc. and Subsidiaries (in thousands - taxable-equivalent basis) Year Ended December 31 ------------------------------ 1995 ------------------------------ Interest Average Income/ Yield/ Balance Expense Cost - --------------------------------------------------------------------------------- Assets: Time deposits $ 18 $ 2 3.80% Securities: U.S. Treasury 238,968 14,142 5.92 U.S. Government agencies and corporations 1,303,204 83,765 6.43 States and political subdivisions: Tax-exempt 5,864 543 9.27 Taxable Other 9,314 593 6.37 ---------- -------- Total securities 1,557,350 99,043 6.36 Federal funds sold and securities purchased under resale agreements 117,158 6,732 5.75 Loans, net of unearned discount 1,682,541 151,197 8.99 ---------- -------- Total Earning Assets and Average Rate Earned 3,357,067 256,974 7.65 Cash and due from banks 381,656 Allowance for possible loan losses (28,468) Banking premises and equipment 90,674 Accrued interest and other assets 143,097 ---------- Total Assets $3,944,026 ========== Liabilities: Demand deposits: Commercial and individual $ 696,499 Correspondent banks 131,295 Public funds 36,772 ---------- Total demand deposits 864,566 Time deposits: Savings and Interest-on-Checking 720,489 12,660 1.76 Money market deposit accounts 616,931 23,675 3.84 Time accounts 964,958 48,024 4.98 Public funds 125,971 5,450 4.33 ---------- -------- Total time deposits 2,428,349 89,809 3.70 ---------- Total deposits 3,292,915 Federal funds purchased and securities sold under repurchase agreements 251,392 13,296 5.29 Long-term notes payable Other borrowings 12,514 733 5.86 ---------- -------- Total Interest-Bearing Funds and Average Rate Paid 2,692,255 103,838 3.85 Accrued interest and other liabilities 63,917 -------- ---- ---------- Total Liabilities 3,620,738 Shareholders' Equity 323,288 ---------- Total Liabilities and Shareholders' Equity $3,944,026 ========== Net interest income $153,136 ======== Net interest spread 3.80% ==== Net interest income to total average earning assets 4.56% ==== The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1996 through 1993 and a 34 percent tax rate for 1992 through 1991. Non-accrual loans are included in the average loan amounts outstanding for these computations.
Consolidated Average Balance Sheets Cullen/Frost Bankers, Inc. and Subsidiaries (in thousands - taxable-equivalent basis) Year Ended December 31 ------------------------------ 1994 ------------------------------ Interest Average Income/ Yield/ Balance Expense Cost - --------------------------------------------------------------------------------- Assets: Time deposits $ 60 $ 2 3.43% Securities: U.S. Treasury 273,556 12,163 4.45 U.S. Government agencies and corporations 1,361,893 80,953 5.94 States and political subdivisions: Tax-exempt 5,860 558 9.52 Taxable 70 5 7.13 Other 29,156 1,618 5.55 ---------- ------- Total securities 1,670,535 95,297 5.70 Federal funds sold and securities purchased under resale agreements 108,762 4,146 3.81 Loans, net of unearned discount 1,339,656 106,706 7.97 ---------- ------- Total Earning Assets and Average Rate Earned 3,119,013 206,151 6.61 Cash and due from banks 341,547 Allowance for possible loan losses (26,142) Banking premises and equipment 89,430 Accrued interest and other assets 134,339 ---------- Total Assets $3,658,187 ========== Liabilities: Demand deposits: Commercial and individual $ 673,764 Correspondent banks 124,416 Public funds 38,531 ---------- Total demand deposits 836,711 Time deposits: Savings and Interest-on-Checking 796,178 14,425 1.81 Money market deposit accounts 547,237 15,709 2.87 Time accounts 854,601 29,364 3.44 Public funds 86,132 2,498 2.90 ---------- ------- Total time deposits 2,284,148 61,996 2.71 ---------- Total deposits 3,120,859 Federal funds purchased and securities sold under repurchase agreements 191,611 7,166 3.74 Long-term notes payable Other borrowings ---------- ------- Total Interest-Bearing Funds and Average Rate Paid 2,475,759 69,162 2.79 ------- ---- Accrued interest and other liabilities 58,712 ---------- Total Liabilities 3,371,182 Shareholders' Equity 287,005 ---------- Total Liabilities and Shareholders' Equity $3,658,187 ========== Net interest income $136,989 ======== Net interest spread 3.82% ==== Net interest income to total average earning assets 4.39% ==== The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1996 through 1993 and a 34 percent tax rate for 1992 through 1991. Non-accrual loans are included in the average loan amounts outstanding for these computations.
Consolidated Average Balance Sheets Cullen/Frost Bankers, Inc. and Subsidiaries (in thousands - taxable-equivalent basis) Year Ended December 31 ------------------------------ 1993 ------------------------------ Interest Average Income/ Yield/ Balance Expense Cost - --------------------------------------------------------------------------------- Assets: Time deposits $ 147 $ 4 2.68% Securities: U.S. Treasury 495,760 22,386 4.52 U.S. Government agencies and corporations 1,021,083 65,155 6.38 States and political subdivisions: Tax-exempt 11,078 1,093 9.86 Taxable 1,148 95 8.25 Other 54,333 2,792 5.14 ---------- -------- Total securities 1,583,402 91,521 5.78 Federal funds sold and securities purchased under resale agreements 255,613 7,714 3.02 Loans, net of unearned discount 1,171,825 91,263 7.79 ---------- -------- Total Earning Assets and Average Rate Earned 3,010,987 190,502 6.33 Cash and due from banks 315,354 Allowance for possible loan losses (31,127) Banking premises and equipment 87,085 Accrued interest and other assets 129,864 ---------- Total Assets $3,512,163 ========== Liabilities: Demand deposits: Commercial and individual $ 631,363 Correspondent banks 143,008 Public funds 42,075 ---------- Total demand deposits 816,446 Time deposits: Savings and Interest-on-Checking 750,386 14,840 1.98 Money market deposit accounts 534,814 13,426 2.51 Time accounts 907,125 27,693 3.05 Public funds 74,979 2,120 2.83 ---------- ------- Total time deposits 2,267,304 58,079 2.56 ---------- Total deposits 3,083,750 Federal funds purchased and securities sold under repurchase agreements 131,096 3,304 2.52 Long-term notes payable 4,075 380 9.33 Other borrowings 508 30 5.91 ---------- ------- Total Interest-Bearing Funds and Average Rate Paid 2,402,983 61,793 2.57 ------- ---- Accrued interest and other liabilities 44,184 ---------- Total Liabilities 3,263,613 Shareholders' Equity 248,550 ---------- Total Liabilities and Shareholders' Equity $3,512,163 ========== Net interest income $128,709 ======== Net interest spread 3.76% ==== Net interest income to total average earning assets 4.27% ==== The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1996 through 1993 and a 34 percent tax rate for 1992 through 1991. Non-accrual loans are included in the average loan amounts outstanding for these computations.
Consolidated Average Balance Sheets Cullen/Frost Bankers, Inc. and Subsidiaries (in thousands - taxable-equivalent basis) Year Ended December 31 ------------------------------ 1992 ------------------------------ Interest Average Income/ Yield/ Balance Expense Cost - --------------------------------------------------------------------------------- Assets: Time deposits $ 203 $ 8 4.10% Securities: U.S. Treasury 621,460 35,167 5.66 U.S. Government agencies and corporations 669,786 56,712 8.47 States and political subdivisions: Tax-exempt 13,126 1,228 9.43 Taxable 11,600 736 6.35 Other 100,839 5,756 5.71 ---------- -------- Total securities 1,416,811 99,599 7.03 Federal funds sold and securities purchased under resale agreements 195,398 6,711 3.43 Loans, net of unearned discount 1,045,883 84,792 8.11 ---------- -------- Total Earning Assets and Average Rate Earned 2,658,295 191,110 7.19 Cash and due from banks 262,995 Allowance for possible loan losses (36,793) Banking premises and equipment 80,794 Accrued interest and other assets 89,953 ---------- Total Assets $3,055,244 ========== Liabilities: Demand deposits: Commercial and individual $ 495,199 Correspondent banks 136,487 Public funds 33,842 ---------- Total demand deposits 665,528 Time deposits: Savings and Interest-on-Checking 541,191 13,486 2.49 Money market deposit accounts 477,877 14,838 3.11 Time accounts 946,480 36,775 3.89 Public funds 79,621 3,708 4.66 ---------- -------- Total time deposits 2,045,169 68,807 3.36 ---------- Total deposits 2,710,697 Federal funds purchased and securities sold under repurchase agreements 102,550 3,139 3.06 Long-term notes payable 14,568 1,378 9.46 Other borrowings ---------- -------- Total Interest-Bearing Funds and Average Rate Paid 2,162,287 73,324 3.39 Accrued interest and other liabilities 35,398 -------- ---- ---------- Total Liabilities 2,863,213 Shareholders' Equity 192,031 ---------- Total Liabilities and Shareholders' Equity $3,055,244 ========== Net interest income $117,786 ======== Net interest spread 3.80% ==== Net interest income to total average earning assets 4.43% ===== The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1996 through 1993 and a 34 percent tax rate for 1992 through 1991. Non-accrual loans are included in the average loan amounts outstanding for these computations.
Consolidated Average Balance Sheets Cullen/Frost Bankers, Inc. and Subsidiaries (in thousands - taxable-equivalent basis) Year Ended December 31 ------------------------------ 1991 ------------------------------ Interest Average Income/ Yield/ Balance Expense Cost - --------------------------------------------------------------------------------- Assets: Time deposits $ 212 $ 13 6.30% Securities: U.S. Treasury 352,698 25,486 7.23 U.S. Government agencies and corporations 818,174 73,899 9.03 States and political subdivisions: Tax-exempt 37,742 3,469 9.19 Taxable 16,717 1,356 8.11 Other 109,231 8,082 7.40 ---------- -------- Total securities 1,334,562 112,292 8.41 Federal funds sold and securities purchased under resale agreements 197,467 11,478 5.81 Loans, net of unearned discount 1,189,565 109,597 9.21 ---------- -------- Total Earning Assets and Average Rate Earned 2,721,806 233,380 8.57 Cash and due from banks 250,412 Allowance for possible loan losses (44,483) Banking premises and equipment 74,014 Accrued interest and other assets 102,904 ---------- Total Assets $3,104,653 ========== Liabilities: Demand deposits: Commercial and individual $ 457,266 Correspondent banks 111,542 Public funds 30,631 ---------- Total demand deposits 599,439 Time deposits: Savings and Interest-on-Checking 473,485 19,377 4.09 Money market deposit accounts 431,141 20,077 4.66 Time accounts 1,145,725 68,528 5.98 Public funds 108,130 7,304 6.75 ---------- ------- Total time deposits 2,158,481 115,286 5.34 ---------- Total deposits 2,757,920 Federal funds purchased and securities sold under repurchase agreements 116,281 5,913 5.08 Long-term notes payable 16,064 1,502 9.35 Other borrowings 266 25 9.54 ---------- ------- Total Interest-Bearing Funds and Average Rate Paid 2,291,092 122,726 5.35 ------- ---- Accrued interest and other liabilities 38,123 ---------- Total Liabilities 2,928,654 Shareholders' Equity 175,999 ---------- Total Liabilities and Shareholders' Equity $3,104,653 ========== Net interest income $110,654 ======== Net interest spread 3.22% ==== Net interest income to total average earning assets 4.07% ==== The above information is shown on a taxable-equivalent basis assuming a 35 percent tax rate for 1996 through 1993 and a 34 percent tax rate for 1992 through 1991. Non-accrual loans are included in the average loan amounts outstanding for these computations.
EX-21 5 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Subsidiaries of Cullen/Frost SUBSIDIARIES OF THE REGISTRANT ------------------------------ As of March 25, 1997, Cullen/Frost owned directly, or indirectly through wholly-owned subsidiaries, the following subsidiaries. PERCENTAGE OF ORGANIZED VOTING SECURITIES UNDER OWNED BY LAWS OF CULLEN/FROST ------------- ----------------- The Frost National Bank United States 100% United States National Bank of Galveston United States 100% Main Plaza Corporation Texas 100% Daltex General Agency, Inc. Texas 100% The New Galveston Company, Inc. Delaware 100% Cullen/Frost Capital Trust I Delaware 100% EX-23 6 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 Consent of Independent Auditors Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Cullen/Frost Bankers, Inc. of our report dated February 7, 1997, except for Note U, as to which the date is March 13, 1997, included in the 1996 Annual Report to Shareholders of Cullen/Frost Bankers, Inc. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-30776) pertaining to the Cullen/Frost Bankers, Inc. 1983 Nonqualified Stock Option Plan, the Registration Statement (Form S-8 No. 33- 30777) pertaining to the Cullen/Frost Bankers, Inc. 1988 Nonqualified Stock Option Plan, the Registration Statement (Form S-8 No. 33-37500) pertaining to the 401(k) Stock Purchase Plan for Employees of Cullen/Frost Bankers, Inc. and its Affiliates, the Registration Statement (Form S-8 No. 33-39478) pertaining to the 1991 Thrift Incentive Stock Purchase Plan for Employees of Cullen/Frost Bankers, Inc. and its Affiliates, the Registration Statement (Form S-8 No. 33- 53492) pertaining to the Cullen/Frost Bankers, Inc. Restricted Stock Plan, the Registration Statement (Form S-8 No. 33-53622) pertaining to the Cullen/Frost Bankers, Inc. 1992 Stock Plan, and the Registration Statement (Form S-4 No. 333-23225 and Form S-4 No. 333-23225-01) pertaining to the registration and exchange of $100,000,000 in Capital Securities, Series A, of our report dated February 7, 1997, except for Note U, as to which the date is March 13, 1997, with respect to the consolidated financial statements of Cullen/Frost Bankers, Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1996. /s/Ernst & Young LLP ERNST & YOUNG LLP San Antonio, Texas March 27, 1997 EX-24 7 POWER OF ATTORNEY EXHIBIT 24 Power of Attorney POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints T.C. Frost, Richard W. Evans, Jr. and Phillip D. Green, and each of them, his true and lawful attorneys-in-fact and agents, and with power of substitution and resubstitution, for him and in his name, place and stead, and in any and all capacities, to sign the Annual Report on Form 10-K of Cullen/Frost Bankers, Inc. for the fiscal year ended December 31, 1996, to sign any and all amendments thereto, and to file such Annual Report and amendments, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in- fact and agents or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Signatures Title Date - ------------------------------- ---------------------------- ------------------ /s/T.C. Frost Senior Chairman of the Board January 28, 1997 - ------------------------------- Chief Executive Officer and ---------------- (T.C. Frost) Director /s/Richard W. Evans, Jr. Chairman of the Board and January 28, 1997 - ------------------------------- Director ---------------- (Richard W. Evans, Jr.) /s/Robert S. McClane President and Director January 28, 1997 - ------------------------------- ---------------- (Robert S. McClane) /s/Isaac Arnold, Jr. Director January 28, 1997 - ------------------------------- ---------------- (Isaac Arnold, Jr.) /s/Royce S. Caldwell Director January 28, 1997 - ------------------------------- ---------------- (Royce S. Caldwell) /s/Ruben R. Cardenas Director January 28, 1997 - ------------------------------- ---------------- (Ruben R. Cardenas) /s/Henry E. Catto Director January 28, 1997 - ------------------------------- ---------------- (Henry E. Catto) /s/Harry H. Cullen Director January 28, 1997 - ------------------------------- ---------------- (Harry H. Cullen) /s/Roy H. Cullen Director January 28, 1997 - ------------------------------- ---------------- (Roy H. Cullen) /s/Eugene H. Dawson, Sr. Director January 28, 1997 - ------------------------------- ---------------- (Eugene H. Dawson, Sr.) Director January 28, 1997 - ------------------------------- ---------------- (Ruben M. Escobedo) Signatures Title Date - ------------------------------- ---------------------------- ------------------ /s/W.N. Finnegan, III Director January 28, 1997 - ------------------------------- ---------------- (W.N. Finnegan III) /s/James W. Gorman, Jr. Director January 28, 1997 - ------------------------------- ---------------- (James W. Gorman, Jr.) /s/James L. Hayne Director January 28, 1997 - ------------------------------- ---------------- (James L. Hayne) /s/Richard M. Kleberg, III Director January 28, 1997 - ------------------------------- ---------------- (Richard M. Kleberg, III) /s/Ida Clement Steen Director January 28, 1997 - ------------------------------- ---------------- (Ida Clement Steen) /s/Curtis Vaughan, Jr. Director January 28, 1997 - ------------------------------- ---------------- (Curtis Vaughan, Jr.) /s/Mary Beth Williamson Director January 28, 1997 - ------------------------------- ---------------- (Mary Beth Williamson) /s/Phillip D. Green Executive Vice President January 28, 1997 - ------------------------------- and Chief Financial Officer ---------------- (Phillip D. Green) EX-27 8
9 1,000 YEAR DEC-31-1996 DEC-31-1996 872,028 0 52,850 0 1,299,285 177,139 181,029 2,252,150 36,308 4,888,384 4,242,594 174,107 92,740 0 0 0 122,410 266,533 4,888,384 183,724 99,562 7,227 290,513 103,475 111,431 179,082 7,300 (980) 180,580 85,737 85,737 0 0 54,978 2.40 2.39 7.71 9,724 5,911 0 6,825 31,577 (10,245) 7,676 36,308 27,087 138 9,083
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